Derivatives Part 1

Practice Questions
Futures and Forwards

1. You purchased one silver future contract at $3 per ounce. What would be your
profit (loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume
the contract size is 5,000 ounces and there are no transactions costs.
A. $5.50 profit
B. $5,500 profit
C. $5.50 loss
D. $5,500 loss
E. None of these is correct.

$4.10 - $3.00 = $1.10 X 5,000 = $5,500

2. You sold one silver future contract at $3 per ounce. What would be your profit
(loss) at maturity if the silver spot price at that time is $4.10 per ounce? Assume the
contract size is 5,000 ounces and there are no transactions costs.
A. $5.50 profit
B. $5,500 profit
C. $5.50 loss
D. $5,500 loss
E. None of these is correct.

$3.00 - $4.10 = -$1.10 X 5,000 = -$5,500

3. You sold one wheat future contract at $3.04 per bushel. What would be your
profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel?
Assume the contract size is 5,000 ounces and there are no transactions costs.
A. $30 profit
B. $300 profit
C. $300 loss
D. $30 loss
E. None of these is correct.

$3.04 - $2.98 = $0.06 X 5,000 = $300

4. You purchased one wheat future contract at $3.04 per bushel. What would be your
profit (loss) at maturity if the wheat spot price at that time were $2.98 per bushel? Assume
the contract size is 5,000 ounces and there are no transactions costs.
A. $30 profit
B. $300 profit
C. $300 loss
D. $30 loss
E. None of these is correct.

$2.98 - $3.04 = -$0.06 X 5,000 = -$300

5. Given a stock index with a value of $1,000, an anticipated dividend of $30 and a
risk-free rate of 6%, what should be the value of one futures contract on the index?
A. $943.40
B. $970.00
C. $1030.00
D. $915.09
E. $1000.00

F = 1000*(1.06) - 30; F = 1030.00

6. You purchased the following futures contract today at the settlement price listed in
the Wall Street Journal. Answer the questions below regarding the contract.

- What is the total value of the futures contract?

- If there is a 10% margin requirement how much do you have to deposit?
- Suppose the price of the futures contract changes as shown in the following table.
- Enter the relevant information into the table. Show your calculations.
 The answers are shown below.

The total value of the contract is $9,174, as shown in the table. If there is a 10%
margin requirement, you will have to deposit $917.40 in cash or securities.

The contract is marked to market daily and profits or losses are posted in the
account. The contract keeps pace with market activity and doesn't change value all
at once at the maturity date. The marking-to-market process protects the
clearinghouse because the margin percentage is calculated daily and if it falls below
the maintenance margin a margin call can be issued. If the investor doesn't meet the
call the clearinghouse can close out enough of the trader's position to restore the
margin.

USE THE FOLLOWING INFORMATION FOR QUESTIONS 7 - 9

December futures on the S&P 500 stock index trade at 250 times the index value of
1187.70. Your broker requires an initial margin of 10% percent on futures contracts. The
current value of the S&P 500 stock index is 1178.

7. How much must you deposit in a margin account if you wish to purchase
one contract? a) $267,232.5
b) $29,450
c) $29,692.50*
d) $30,000
e) $265,050

Margin = 0.10 x 250 x 1187.70 = $29,692.50

8. Suppose at expiration the futures contract price is 250 times the index value of 1170.
Disregarding transaction costs, what is your percentage return?
a) 1.87%
b) -0.68%
c) -14.90%*
d) 10.36%
e) None of the above

Purchase December
contract 250 x 1187.7 =
$296,925

Sell December
contract 250 x 1170 =
$292,500
Loss in futures = $292,500 - $296,925 = -$4425

Rate of return = -$4425/29,692.50 = -.1490 or -14.9%

9. Calculate the return on a cash investment in the S&P 500 stock index over the same
time period
a) 1.87%
b) -0.68%*
c) -14.90%
d) 10.36%
e) None of the above

Return on cash investment in the index = (1170 – 1178)/1178 = -0.0068 or 0.68%

10. Today’s settlement price on a Chicago Mercantile Exchange (CME) Yen futures contract
is $0.8011/¥100. Your margin account currently has a balance of $2,000. The next three
days’ settlement prices are $0.8057/¥100, $0.7996/¥100, and $0.7985/¥100. (The
contractual size of one CME Yen contract is ¥12,500,000). If you have a short position in
one futures contract, the changes in the margin account from daily marking-to-market will
result in the balance of the margin account after the third day to be:
a. $1,425
b. $2,000
c. $2,325
d. $3,425

11. Mr Stinson entered into a futures contract yesterday to buy $2,500 at R6.80 per $.
Suppose that the futures price closes today at R6.65. How much have you made/lost?
a. You have lost R375.00
b. You have made R375.00
c. You have made $375.00
d. You have lost $375.00.

Rationale: You have lost R0.15, 2,500 times for a total loss of R375 = R0.15/$ × $2,500

12. Yesterday, Mr Stinson entered into a futures contract to buy $2,500 at R6.80 per $. The
bank asked him to deposit an initial margin of R400 and gave him a maintenance level of
R150. At what price will Mr Stinson receive a margin call and be asked to post additional
fund into his account?
a. $6.70 per R.
b. When the account drops to R250
c. R6.70 per $
d. R6.74 per $

Rationale: To get a margin call, you have to lose R250. That will happen when the price
FALLS (since you’re buying dollars) to R6.70 per $:
[R6.80/ $ – R6.70 per $] × $2,500 = R250.
13. Miss Fortune is expecting to receive a bonus in 5 months time and has decided to use
her money to buy Aztec shares. At present the shares are worth R57.50 but Miss Fortune is
worried that the share will increase in value and become too expensive for her to buy. She
then decides to buy a forward, that will allow her to buy the shares in 5 months time at
R59.00. If after 5 months, the shares are worth R56.00, did Miss Fortune benefit from the
forward?
a. Yes Miss Fortune will benefit from the forward agreement as she will have to pay
R59.00 for each share whereas in the market they are only worth R56.00
b. No Miss Fortune will not benefit as the she will have to sell the shares at R56.00
whereas in the market she could have sold them for R59.00
c. Yes Miss Fortune will benefit as the she can sell the shares at R59.00 whereas in the
market she would have had to ssold them for R59.00
d. No Miss Fortune will not benefit as the she will have to pay R59.00 for each share
whereas in the market she could have bought them for R56.00.

14. If the initial margin is $5,000, the maintenance margin is $3,500 and your balance is
$4,000, how much must you deposit?
a. $6,000
b. $1,500
c. $9,000
d. nothing

15. December futures on the S&P 500 stock index trade at 250 times the index value of
1187.70. Your broker requires an initial margin of 10% percent on futures contracts. The
current value of the S&P 500 stock index is 1178. How much must you deposit in a margin
account if you wish to purchase one contract?
a. $267,232.5
b. $267,232.5
c. $29,692.50
d. $267,232.5

Margin = 0.10 250 1187.70 = $29,692.50

Use the following information to answer the next three questions

You, a farmer, anticipate taking 80,000 bushels of soybeans to the market in three months.
The current cash price for soybeans is $5.85. The size of the futures contract is 5,000
bushels per contract and the current three-month futures price is $5.88.

16. If you wanted to hedge one-half of your exposure to a drop in the value of soybeans, how
many futures contracts would you buy or sell?
a. Sell eight futures contracts.
b. Sell sixteen futures contracts.
c. Buy sixteen futures contracts.
d. Sell four futures contracts.
17. Assume that in three months, when you take the soybeans to market, you close out the
futures contracts and the price has fallen to $5.80. What is the total loss in value over the
three months on the actual soybeans you produced and took to market?
a. $2,400
b. $3,200
c. $4,000
d. $6,400

Loss = ($5.85 - $5.80) x 80,000 = $4000

18. Assume that in three months, when you take the soybeans to market, you close out the
futures contracts and the price has fallen to $5.80. How much did this hedge in the futures
market generate in gains?
a. $2,400
b. $3,200
c. $4,000
d. $6,400

Gain = ($5.85 - $5.80) x (8 x 5,000) = $3,200

19. You have heard that there may be arbitrage opportunities in the futures market. You
conduct some research and find that the price on a 1 year oil future contract is $130 per
barrel. Currently the spot price of oil is at $112 per barrel, and the 1 year US interest rate is at
4.50%. Ignoring the costs, is there an arbitrage opportunity?
a. No there is not an arbitrage opportunity because the forward price of oil is less than
the futures price
b. Yes there is an arbitrage opportunity because the forward price of oil is more than the
futures price
c. No there is not an arbitrage opportunity because the forward price of oil is more than
the futures price.
d. Yes there is an arbitrage opportunity because the forward price of oil is less than the
futures price

F = S(1 +r)T
F = 112(1+0.045) = 117.05
Therefore yes there is an arbitrage opportunity

20. Based on question 34 above, what would be the profit or loss gained from this arbitrage
opportunity, if you take it?
a. $5.85 profit
b. $12.95 profit
c. $5.85 loss
d. $12.95 loss