1. Zack Wheat has just sold four September 5,000-bushel corn futures contracts at $4.95 per bushel. The initial margin requirement is 4%.
How many dollars in initial margin must Zack put up?
(1) If the September price of corn rises to $5.36, how much equity is in Zack's commodity account? Compute $ and % profit or loss.
(2) If the September price of corn falls to $4.50, how much equity is in Zack's commodity account? Compute $ and % profit or loss.
2. Sullivan bought 10 number of December, 2015 S&P 500 index futures contracts at 2,075. If the index rises to 2,100, what is Sleeper's dollar profit? The multiplier for the S&P 500 index futures contract is 250.
3. The margin requirements on the S&P 500 futures contract are 10%. If one sells the contract at 2,075, and each contract has a multiplier of 250, how much margin must be put up for eachcontract sold? If the futures price falls by 1.75% from the level of 2,075 what will happen to margin account of the investor who holds one contract? What will be the investor's percentage return (gain or loss) based on the amount put up as margin?
4. The S&P index is currently is at 2,150. You manage a $5 million indexed equity portfolio (Therefore, the beta of this portfolio is 1, same as the Market) The S&P 500 futures contract has a multiplier of 250.
(1) If you are bearish on the stock market, how many contracts should you sell at 2,150 to fully eliminate your risk over the next 6 months?
(2) How would your hedging strategy change if instead of holding an indexed portfolio, you hold a portfolio of socks with a beta of 1.5? How many contracts would now choose to sell? Would your hedged position be riskless?