## DERIVATIVES (ASSIGNMENT 1) Case Solution

## DERIVATIVES (ASSIGNMENT 1) Case Solution

**DERIVATIVES (ASSIGNMENT 1)**

**Q1**

** The calculations for this part are shown below:**

Q1

Total Notional Amount (5000x4.5) 22500

Initial Margin 3000

Maintenance Margin 2000

Total Notional has to fall by 1000 to hit margin call

The total value would be (22500+1000)/5000 4.7

For the second part, price must fall by (22500-1500)/5000 4.2 to withdraw upto $ 1500

For the first part, the price needs to be $ 4.7 and for the second part the price needs to be $ 4.2.

**Q2**

** The net payout for the farmer Jones would be as follows:**

FORWARDS

Bushel Crops Delivery Price set Payout

Long Position 10000 5.75 57500

Short Position 10000 6 60000

Net Payout (Profit) 2500

Q3

Generally, the settlement price of the futures contract is related to the underlying asset which is basically based upon the spot-futures parity theorem and this theory states a formula for computing the settlement prices for the futures which is:

Settlement price = Spot price * (1+Risk free interest rate)

Therefore, in this case the clearing house is recommended to use the following settlement price for the May futures which did not trade today:

$800 * (1+5%)^3 = $ 926.1 per OZ

**Q4**

** The calculations for this part could be seen in the excel spreadsheet and the results are shown in the table below:**

**FUTURES**

Day Futures Settlement Mark to Margin gains/losses Margin Margin Call

1 1003 6000 794000 7206000

2 1013 20000 780000 7220000

3 1025 24000 776000 7224000

4 1020 -10000 810000 7190000

** Q5**

* The simple arbitrage strategy for the forwards in this case would be to buy the stock at the current stock price of $ 50 per share and also enter into a forwards contract short position on the same stock with a delivery price of $ 50 per share. During the time period before maturity, the investor can do buying and selling of the stock and if at maturity the stock price is less than $ 50 per share, then he can sell his purchased stock at that time at the price of $ 50 per share and make a riskless profit............*

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