Explain how CCPs work. What are the advantages to the financial system
11A trader buys two July futures contracts on orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 120 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call? Under what circumstances could $2,000 be with- drawn from the margin account?
2-15At the end of one day a clearing house member is long 100 contracts, and the settlement price is $50,000 per contract. The original margin is $2,000 per contract. On the following day the member becomes responsible for clearing an additional 20 long contracts, entered into at a price of $51,000 per contract. The settlement price at the end of this day is $50,200. How much does the member have to add to its margin account with the exchange clearing house?
2-24Explain how CCPs work. What are the advantages to the financial system of requiring all standardized derivatives transactions to be cleared through CCPs?
Compare forward and futures contracts.
1 Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?
15‘‘When the futures price for an asset is less than the spot price, long hedges are likely to be particularly attractive.’’ Explain this statement.
16The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.2. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.4. The correlation between the futures price changes and the spot price changes is 0.7. It is now October 15. A beef producer is committed to purchasing 200,000 pounds of live cattle on November 15. The producer wants to use the December live-cattle futures contracts to hedge its risk. Each contract is for the delivery of 40,000 pounds of cattle. What strategy should the beef producer follow?
24A trader owns 55,000 units of a particular asset and decides to hedge the value of her position with futures contracts on another related asset. Each futures contract is on 5,000 units. The spot price of the asset that is owned is $28 and the standard deviation of the change in this price over the life of the hedge is estimated to be $0.43. The futures price of the related asset is $27 and the standard deviation of the change in this over the life of the hedge is $0.40. The coefficient of correlation between the spot price change and futures price change is 0.95.
(a) What is the minimum variance hedge ratio?
(b) Should the hedger take a long or short futures position?
(c) What is the optimal number of futures contracts when issues associated with daily settlement are not considered?
(d) How can the daily settlement of futures contracts be taken into account?
Explain basis risk.
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Derivatives markets are critical in risk management and help in the discovery of prices. Prices of futures rely on the available and continuous flow of information in the derivatives markets across the world. The derivatives markets allow hedgers to insulate their positions and speculators to have leveraged positions. Further, a derivatives………………
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