Financial Derivatives & Risk Management

Assignment-1

Each Question carries 5 Marks (Question No. 5 carries 10 Marks)

1. Tabulate the difference between forwards, futures and options.

2. Suppose that you enter into a short futures contract to sell July silver for Rs. 5.20 per ounce
on the MCX. The size of the contract is 5000 ounces. The initial margin is Rs. 4000 & the
maintenance margin is Rs. 3000. At what spot price level of silver will a margin call occur?

3. Suppose that the standard deviation of quarterly changes in the prices of a commodity is $
0.60, the standard deviation of quarterly changes in a futures price on the commodity is $0.71,
and the coefficient of correlation between the two changes is 0.45. What is the closest optimal
hedge ratio for a three-month contract?
4. A company has a Rs.30 lacs portfolio with a beta of 1.44. It would like to use futures contract
on the BSE Sensex to hedge its risk. The index is currently standing at 28221 (as on 5-Oct-
2018) and each contract is for 10 contracts. How many number of contracts must be bought
or sold by the company?
5. On 05-Oct-2018, you find the below specifications for Nov2018 Aluminum Futures in MCX
(https://www.mcxindia.com/en/market-data/get-quote/ALUMINIUM/30NOV2018). If you
want to long 6 contracts in this future, what will be your initial margin deposit and
maintenance margin amount?
Symbol: ALUMINIUM
Delivery Unit: 5 MT (1 MT = 1 Metric Ton = 1000 kgs)
Expiry: 30NOV2018
Last Traded Price: 111.80 / kg
Initial Margin: 4%
Maintenance Margin: 75% of Initial Margin