You expect the stock market to increase, but instead of acquiring stock, you decide to acquire a stock index futures contract. That index is currently 1120, and the contract has a value that is $50 times the amount of the index. The margin requirement is $2,500.
a. When you make the contract, how much must you put up?
b. What is the value of the contract based on the index?
c. If the value of the index rises 1 percent to 1131, what is the profit on the investment? What is the percentage earned on the funds you put up?
d. If the value of the index declines 1 percent to 1108, what percentage of your funds will you lose?
e. What is the percentage you earn (or lose) if the index falls to 1108?