Question-1 The six month and one-year rates are 3% and 4% per annum with semi-an
ID: 2382856 • Letter: Q
Question
Question-1
The six month and one-year rates are 3% and 4% per annum with semi-annual compounding. Is 3.90% or 3.95% or 3.99% closest to the one-year par yield expressed with semi-annual compounding? (3 marks)
Question-2
A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. Explain what is the futures price per unit above which there will be a margin call? (3 marks)
Question-3
The spot price of an investment asset is $30 and the risk-free rate for all maturities is 10% with continuous compounding. The asset provides an income of $2 at the end of the first year and at the end of the second year. What is the three-year forward price? (2 mark)
Question-4
On March 1 a commodity’s spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company? (2 marks)
Explanation / Answer
Answer:1 If the six month and one-year rates are 3% and 4% per annum with semi-annual compounding, then 3.99% is closest to the one-year par yield expressed with semi-annual compounding, because 3.99 is the closest number to 4.
Answer:2 The future price per unit is 72 cents above which there will be a margin call.
There will be margin call when more than $1000 has been lost from the margin accounts so that the balance in the account is below the maintainence margin level.Because the company is short, each one cents rise in the price leads to a loss or 0.01*50000 or $500.A greater than 2 cents rise in the futures price will therefore lead to a margin call. The future price is currently 70 cents.When the price rises above 72 cents there will be margin call.
Answer:3 $35.84
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