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Chapter 2 - Mechanics - Practice Questions

1. Open interest refers to the total number of outstanding futures contracts, while trading volume is the number of contracts traded over a given period of time. 2. For a short futures contract to sell 5,000 ounces of July silver at $17.20 per ounce, with an initial margin of $4,000 and maintenance margin of $3,000, a price increase above $17.20 would lead to a margin call. 3. A limit order to sell at $2 means an order to sell futures contracts if and when the price reaches $2 per unit.

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Hamza Naeem
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256 views

Chapter 2 - Mechanics - Practice Questions

1. Open interest refers to the total number of outstanding futures contracts, while trading volume is the number of contracts traded over a given period of time. 2. For a short futures contract to sell 5,000 ounces of July silver at $17.20 per ounce, with an initial margin of $4,000 and maintenance margin of $3,000, a price increase above $17.20 would lead to a margin call. 3. A limit order to sell at $2 means an order to sell futures contracts if and when the price reaches $2 per unit.

Uploaded by

Hamza Naeem
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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CHAPTER 2 MECHANICS OF FUTURES MARKET

1. Distinguish between the term open interest and trading volume.

2. Suppose that you enter into a short futures contract to sell July silver for $17.20 per ounce. The size
of the contract is 5,000 ounces. The initial margin is $4,000 and the maintenance margin is $3,000.
What change in the futures price will lead to a margin call?

3. What does a limit order to sell at $2 mean?

4. What is the difference between the operation of the margin accounts administered by a clearing house
and those administered by a broker?

5. Explain how margins protect investors against the possibility of default.

6. A trader buy two July futures contracts on orange juice. Each contract is for the delivery of 15,000
pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and
the maintenance margin is $4,500 per contract. What price change would lead to a margin call? Under
what circumstances $2,000 could be withdrawn from the margin account.

7. Show that, if the futures price of a commodity is greater than the spot price during the delivery
period. Does an arbitrage opportunity exist if the future is less than the spot price? Explain your
answer.

8. At the end of one day a clearing house member is long 100 contracts, and the settlement price is
$50,000 per contract. The original margin is $2,000 per contract. One the following day the member
becomes responsible for clearing an additional 20 long contracts, entered into at a price of $51,000
per contract. The settlement price at the end of this day is $50,200. How much does the member have
to add to its margin account with the exchange clearing house.

9. Suppose that, on October 24, 2012, a company sells one April 2013 live cattle futures contract. It
closes out its position on January 21, 2013. The futures price (per pound) is 91.20 cents when it enters
into the contract, 88.30 cents when its closes and 88.80 cents at the end of December 2012. One
contract is for the delivery of 40,000 pounds of cattle. What is the total profit? (Assume that the
company has December 31st year-end)

10. Trader A enters into futures contracts to buy 1 million euros for 1.4 million dollars in three months.
Trader B enters in a forward contract to do the same thing. The exchange rate (dollars per euro)
declines sharply during the first two months and then increases for the third month at 1.4300.
Ignoring daily settlements, what is the total profit of each trader? When the impact of daily settlement
is taken into account, which trader has done better?

11. One orange juice futures contract is on 15,000 pounds of frozen concentrate. Suppose that in
September 2011 a company sells a March 2013 orange juice futures contracts for 120 cents per
pound. In December 2011, the futures price is 140 cents, in December 2012, it is 110 cents and in
February 2013, it is closed out at 125 cents. The company has a December year end. What is the
companys profit or loss on the contract?
12. A company enters into a short futures contract to sell 5,000bushels of wheat for 450 cents per bushel.
The initial margin is $3,000 and the maintenance margin is $2,000. What price change would lead to
a margin call?

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