Tutorial 3 Questions This tutorial is based on practice and further questions selected from Hull (2017), Chapter 2

Tutorial 3 Questions

This tutorial is based on practice and further questions selected from Hull (2017), Chapter 2.

Problem 2.1.

Distinguish between the terms open interest and trading volume.

Problem 2.2.

What is the difference between a local and a futures commission merchant?

Problem 2.3.

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? What happens if you do not meet the margin call?

Problem 2.4.

Suppose that in September 2015 a company takes a long position in a contract on May 2016 crude oil futures. It closes out its position in March 2016. The futures price (per barrel) is $88.30 when it enters into the contract, $90.50 when it closes out its position, and $89.10 at the end of December 2015. One contract is for the delivery of 1,000 barrels. What is the company’s total profit? When is it realized? How is it taxed if it is (a) a hedger and (b) a speculator? Assume that the company has a December 31 year-end.

Problem 2.5.

What does a stop order to sell at $2 mean? When might it be used? What does a limit order to sell at $2 mean? When might it be used?

Problem 2.6.

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

Problem 2.7.

What differences exist in the way prices are quoted in the foreign exchange futures market, the foreign exchange spot market, and the foreign exchange forward market?

Problem 2.8.

The party with a short position in a futures contract sometimes has options as to the precise asset that will be delivered, where delivery will take place, when delivery will take place, and so on. Do these options increase or decrease the futures price? Explain your reasoning.

Problem 2.9.

What are the most important aspects of the design of a new futures contract?

Problem 2.10.

Explain how margin accounts protect futures traders against the possibility of default.