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    Test Bank Chapter 2

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    Hajji
    This document provides a test bank of questions for Chapter 2 of an options and futures textbook. It includes 4 multiple choice questions testing comprehension of concepts like margin calls, maintenance margins, and the impact of futures contract closures on open interest. The answers are provided using mathematical notation to calculate account balances based on initial margins, contract multipliers, and changes in futures prices.

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    Test Bank Chapter 2

    Uploaded by

    Hajji
    1K views3 pages
    This document provides a test bank of questions for Chapter 2 of an options and futures textbook. It includes 4 multiple choice questions testing comprehension of concepts like margin calls, maintenance margins, and the impact of futures contract closures on open interest. The answers are provided using mathematical notation to calculate account balances based on initial margins, contract multipliers, and changes in futures prices.

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    This document provides a test bank of questions for Chapter 2 of an options and futures textbook. It includes 4 multiple choice questions testing comprehension of concepts like margin calls, maintenance margins, and the impact of futures contract closures on open interest. The answers are provided using mathematical notation to calculate account balances based on initial margins, contract multipliers, and changes in futures prices.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1K views3 pages

    Test Bank Chapter 2

    Uploaded by

    Hajji
    This document provides a test bank of questions for Chapter 2 of an options and futures textbook. It includes 4 multiple choice questions testing comprehension of concepts like margin calls, maintenance margins, and the impact of futures contract closures on open interest. The answers are provided using mathematical notation to calculate account balances based on initial margins, contract multipliers, and changes in futures prices.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Test Bank Chapter 2

    Rotman School of Management


    MGT 438 Options and Futures

    Marcel Rindisbacher

    January 24, 2007


    Test Questions Chapter 2

    The following collection of questions provides a quick comprehension test for Chapter 2.

    1. A company enters into a short futures contract to sell 50,000 pounds of cotton for 70 cents.
    The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price
    above which there will be a margin call?

    2. A company enters into a long futures contract to buy 1,000 barrels of oil for $20 per barrel.
    The initial margin is $6,000 and the maintenance margin is $4,000. What oil futures price
    will allow $2,000 to be withdrawn from the margin account?

    3. On the floor of a futures exchange one futures contract is traded where both the long and
    short parties are closing out existing positions. What is the resultant change in the open
    interest?

    4. You sell three December gold futures contracts when the futures price is $410 per ounce.
    Each contract is on 100 ounces of gold and the initial margin per contract is $2,000. The
    maintenance margin per contract is $1,500. During the next seven days the futures prices
    rises slowly to $412 per ounce. What is the balance of your margin account at the end of the
    seven days?

    Answers

    Use the following notation for questions 1,2,4:

    • M0 : initial balance of margin account

    • M1 : new balance of margin account

    • M : maintenance margin

    • F0 : initial futures price

    • F1 : new futures price

    • Q multiplier of future contract

    1
    • N: number of futures contracts

    1. We are short a futures contract and therefore receive a margin call if

    M0 + Q × (F0 − F1 ) ≤ M

    and therefore
    M0 − M $4, 000 − $3, 000
    F1 ≥ + F0 = + $0.7 = $0.72
    Q 50, 000

    2. We can withdraw W if
    M0 − Q × (F0 − F1 ) ≥ M0 + W

    or equivalently,
    W $2, 000
    F1 ≤ + F0 = + $20 = $22.
    Q 1, 000

    3. Open interest is down one contract.

    4. The end balance is


     
    M0
    N× + Q × (F0 − F1 ) = 3 × ($2, 000 + 100 × ($410 − $412)) = $5, 400.
    N

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