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1、CHAPTER 2 Mechanics of Futures Markets Practice Questions Problem 2 1 Distinguish between the terms open interest and trading volume The open interest of a futures contract at a particular time is the total number of long positions outstanding Equivalently it is the total number of short positions o
2、utstanding The trading volume during a certain period of time is the number of contracts traded during this period Problem 2 2 What is the difference between a local and a futures commission merchant A futures commission merchant trades on behalf of a client and charges a commission A local trades o
3、n his or her own behalf 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 h
4、appens if you do not meet the margin call There will be a margin call when 1 000 has been lost from the margin account This will occur when the price of silver increases by 1 000 5 000 0 20 The price of silver must therefore rise to 17 40 per ounce for there to be a margin call If the margin call is
5、 not met your broker closes out your position 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 ou
6、t 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 The total profit is 90 50 88 30 1 00
7、0 2 200 Of this 89 10 88 30 1 000 or 800 is realized on a day by day basis between September 2015 and December 31 2015 A further 90 50 89 10 1 000 or 1 400 is realized on a day by day basis between January 1 2016 and March 2016 A hedger would be taxed on the whole profit of 2 200 in 2016 A speculato
8、r would be taxed on 800 in 2015 and 1 400 in 2016 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 A stop order to sell at 2 is an order to sell at the best available price once a price of 2 or less is reached
9、It could be used to limit the losses from an existing long position A limit order to sell at 2 is an order to sell at a price of 2 or more It could be used to instruct a broker that a short position should be taken providing it can be done at a price more favorable than 2 Problem 2 6 What is the dif
10、ference between the operation of the margin accounts administered by a clearing house and those administered by a broker The margin account administered by the clearing house is marked to market daily and the clearing house member is required to bring the account back up to the prescribed level dail
11、y The margin account administered by the broker is also marked to market daily However the account does not have to be brought up to the initial margin level on a daily basis It has to be brought up to the initial margin level when the balance in the account falls below the maintenance margin level
12、The maintenance margin is usually about 75 of the initial margin 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 In futures markets prices are quoted as the number of US do
13、llars per unit of foreign currency Spot and forward rates are quoted in this way for the British pound euro Australian dollar and New Zealand dollar For other major currencies spot and forward rates are quoted as the number of units of foreign currency per US dollar Problem 2 8 The party with a shor
14、t 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 These options make the contract less attractive
15、to the party with the long position and more attractive to the party with the short position They therefore tend to reduce the futures price Problem 2 9 What are the most important aspects of the design of a new futures contract The most important aspects of the design of a new futures contract are
16、the specification of the underlying asset the size of the contract the delivery arrangements and the delivery months Problem 2 10 Explain how margin accounts protect investors against the possibility of default A margin is a sum of money deposited by an investor with his or her broker It acts as a guarantee that the investor can cover any losses on the futures contract The balance in the margin account is adjusted daily to reflect gains and losses on the futures contract If losses are above a ce
