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    MGMT 476 Homework #1

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    Fang
    This document contains questions about derivatives concepts like options, futures, and swaps as well as questions about margin accounts and futures contract delivery options. It asks the reader to define key terms, identify differences between futures and forwards, explain delivery options and their impact on hedging and valuation, calculate conversion factors for deliverable bonds, and determine gains and losses in a margin account for a short futures position over time.

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    MGMT 476 Homework #1

    Uploaded by

    Fang
    36 views3 pages
    This document contains questions about derivatives concepts like options, futures, and swaps as well as questions about margin accounts and futures contract delivery options. It asks the reader to define key terms, identify differences between futures and forwards, explain delivery options and their impact on hedging and valuation, calculate conversion factors for deliverable bonds, and determine gains and losses in a margin account for a short futures position over time.

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    This document contains questions about derivatives concepts like options, futures, and swaps as well as questions about margin accounts and futures contract delivery options. It asks the reader to define key terms, identify differences between futures and forwards, explain delivery options and their impact on hedging and valuation, calculate conversion factors for deliverable bonds, and determine gains and losses in a margin account for a short futures position over time.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    36 views3 pages

    MGMT 476 Homework #1

    Uploaded by

    Fang
    This document contains questions about derivatives concepts like options, futures, and swaps as well as questions about margin accounts and futures contract delivery options. It asks the reader to define key terms, identify differences between futures and forwards, explain delivery options and their impact on hedging and valuation, calculate conversion factors for deliverable bonds, and determine gains and losses in a margin account for a short futures position over time.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    MGMT 476 Homework #1

    1. Define and explain in your own words:


    a. Derivatives

    b. Options

    c. Futures

    d. Forwards

    e. Swaps

    2. Identify the main institutional differences between futures contracts and forward
    contracts.

    3. Explain the term “delivery options." What is the rationale for providing delivery options
    to the short position in futures contracts? What disadvantages for hedging are created by
    the presence of delivery options? For valuation?
    4. The standard bond in the Treasury bond futures contract is one with a face value of
    $100,000, at least 15 years to maturity or first call, and a coupon of 6%. Of the delivery
    options provided in the contract, the most important is the \quality option" that allows the
    short position to substitute any coupon for the standard 6%. The price that the long
    position has to pay is the quoted futures price times a conversion factor which depends on
    the bond that is actually delivered. The conversion factor is calculated by discounting the
    cash flows from the delivered bond at the standard 6% rate.

    a. Suppose the delivered bond in the Treasury Bond futures contract has a remaining
    maturity of 20 years and a 7% coupon. Assume the last coupon was just paid.
    What is its conversion factor?

    b. Suppose there are two deliverable bonds in the Treasury Bond futures contract, a
    15-year 8% coupon bond and a 22-year 8% coupon bond. Assume the last coupon
    on both bonds was just paid. Which bond has the higher conversion factor?
    5. An investor enters into a short futures position in 10 contracts in gold at a futures price of
    $276.50 per oz. The size of one futures contract is 100 oz. The initial margin per contract
    is $1,500, and the maintenance margin is $1,100.

    a. What is the initial size of the margin account?

    b. Suppose the futures settlement price on the first day is $278.00 per oz. What is the
    new balance in the margin account? Does a margin call occur? If so, assume that
    the account is topped back to its original level.

    c. The futures settlement price on the second day is $281.00 per oz. What is the new
    balance in the margin account? Does a margin call occur? If so, assume that the
    account is topped back to its original level.

    d. On the third day, the investor closes out the short position at a futures price of
    $276.00. What is the final balance in his margin account?

    e. Ignoring interest costs, what are his total gains or losses?

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