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    The document contains 8 questions related to risk management and derivatives. Specifically, it asks about the purpose of daily futures contract settlement, why margin accounts are required for futures buyers and sellers, when a futures broker may need to work with another broker, how perfectly hedging a portfolio with futures works, why purchasing futures can increase a portfolio's beta, the difference between over-the-counter and exchange-traded markets as well as bid and offer quotes for market makers, calculating profits and losses on a short wool futures position with changes in price and margin amounts, and determining profits, realization timing, and tax treatment for a company with a long crude oil futures position that is subsequently closed out.

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    The document contains 8 questions related to risk management and derivatives. Specifically, it asks about the purpose of daily futures contract settlement, why margin accounts are required for futures buyers and sellers, when a futures broker may need to work with another broker, how perfectly hedging a portfolio with futures works, why purchasing futures can increase a portfolio's beta, the difference between over-the-counter and exchange-traded markets as well as bid and offer quotes for market makers, calculating profits and losses on a short wool futures position with changes in price and margin amounts, and determining profits, realization timing, and tax treatment for a company with a long crude oil futures position that is subsequently closed out.

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    8 views2 pages

    W5 Questions

    Uploaded by

    Jingchi Li
    The document contains 8 questions related to risk management and derivatives. Specifically, it asks about the purpose of daily futures contract settlement, why margin accounts are required for futures buyers and sellers, when a futures broker may need to work with another broker, how perfectly hedging a portfolio with futures works, why purchasing futures can increase a portfolio's beta, the difference between over-the-counter and exchange-traded markets as well as bid and offer quotes for market makers, calculating profits and losses on a short wool futures position with changes in price and margin amounts, and determining profits, realization timing, and tax treatment for a company with a long crude oil futures position that is subsequently closed out.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 2

    EFB344 Risk Management and Derivatives

    Tutorial W5: Forwards and Futures 1

    Readings: Hull et al. (2014) Fundamentals of Futures and Options,


    Ch. 1: 1.1 – 1.4, Ch. 2 and Ch. 3

    _________________________________________________________________________________

    General Questions:

    Question 1
    What is the primary purpose of the daily settlement of futures contracts?

    Question 2
    Why are both the buyer and the seller of the futures contract required to establish a margin account?

    Question 3
    Why might a futures broker require the services of another futures broker when completing customer
    transactions in the futures market?

    Question 4
    My portfolio has a beta of 1. Let VA be the value of the portfolio and VF is the notional value of a
    S&P200 futures contract (F0,T x $25). If I sell 𝑉𝐴 /𝑉𝐹 futures, discuss whether my portfolio is perfectly
    hedged.

    Question 5
    The beta of an ASX SPI200 futures contract is assumed to be equal to 1 and betas are linearly additive.
    If I have a portfolio beta of 1.5, why will the purchase of ASX SPI200 futures increase my portfolio beta
    above 1.5 when the two exposures being combined together have betas of 1 and 1.5?

    Question 6

    What is the difference between the over-the-counter and the exchange-traded market? What are
    the bid and offer quotes of a market maker in the over-the-counter market?
    Question 7

    Suppose you enter into a short futures contract to sell December fine wool for AUD 15.00 per
    kilogram on the ASX. The size of the contract is 2500 kilograms. The initial margin is $4000,
    equating to the maintenance margin. If the price of the fine wool futures increases to AUD 15.75
    per kilogram, what will be the balance of the margin account? Determine the amount of the margin
    call, if appropriate.

    Question 8

    Suppose that in September 2012 an American company takes a long position in a contract on May
    2013 crude oil futures. It closes out its position in March 2013. The futures price (per barrel)
    is $68.30 when it enters into the contract, $70.50 when it closes out the position, and $69.10
    at the end of December 2012. One contract is for delivery of 1000 barrels. What is the
    company’s profit? When is it realised? How is it taxed if it is: (a) a hedger, and (b) a
    speculator? Assume that the company has a 31 December year end.

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