Question 17 The March 2018 S&P; futures index is reading 2270 while the cash mar

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Question 17 The March 2018 S&P; futures index is reading 2270 while the cash market is 2250, the contract value of each index point is $100. You are convinced the cash market will rise by 10% by expiry. You are only prepared to buy or sell one futures contract i) Will you buy or sell a S&P; futures contract ? [] (i) What is your profit (+) in dollars on expiry if you are correct? [1] (ii) What is your profit (+loss )if the futures price on expiry is 2100? [1.5] (iv) What is your profit +loss -if the futures price on expiry is 2000? [1.5] Question 18 (a) Explain the difference between "initial margin" and "variation margin" when applied to a futures contract. [4] (b) Do both parties have to pay variation margin on a futures contract? [I

Explanation / Answer

Q17. Contract date = March 2018

future index = 2270

Current value (cash market) = 2250

Contract value = 100

Total value invested per future contract = $2270+$100 = $2370

There is expectation that cash market will increase by 10% before expiration. So, expected cash market = 2250*1.1 = 2475

1)Yes, I will buy the contract if cash market will going to 10% as per the investor expectation.

2) If expectation is correct then profit from the transaction = 2475 - 2370 = $105

3) If on expiration date, the cash market is 2100 then profit/loss(-) = spot - future value = 2100 - 2370 = - 270

4) If on expiration date, the cash market is 2000 then profit/loss(-) = spot - future value = 2000 - 2370 = - 370

4)

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