Q1) Assume that a trader buys a Euro futures contract of 125,000 at the per-unit price...

 

 

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Q1) Assume that a trader buys a Euro futures contract of €125,000 at the per-unit price of $1.6012/€ on day 1. Assume that the trader needs to post a margin of $3250 for this contract and the maintenance level is $2500. Finally, assume that this contract expires/matures on day 5. Margin Margin Adjustment Contribution Account Day Action Futures Contract Margin Unit Price Price ($/E) or Withdrawal 1 Buy $1.6012/€ ? +$3250 $3250 2 Settle $1.5976/€ $199,700 ? Settle ? $199,300 ? 4 Settle $1.6040/€ $200,500 ? Settle ? ? ? $4950 Position: Long; Contract size: €125,000; Margin: 3250; Maintenance level: 2500 a) Given the information in the table above, fill in the blanks (1 mark) b) How many dollars does the trader pay to buy €125,000 at the end of day 5? What is the "effective per unit price" that the trader pays for the contract? Explain. (1 mark) c) Assume that on day 1, the trader was contemplating negotiating a forward contract written on €125,000 at a rate of $1.6012/€. Offer an explanation for the trader choosing to enter into the futures contract instead. (1 mark) d) Now suppose that on day 1, the following instruments are available to the trader: = 1.608 and a premium of (1) European call options on the EUR, with a strike price of Esje $0.05/€, and; (2) European put options on the EUR, with a strike price of Es/e = 1.608 and a premium of $0.03/€ Both contracts are written on €125,000 and expire on day 5. The table below shows seven different scenarios that correspond to the expectation (as on day 1) of the spot exchange rate on day 5. Is it possible for the trader to make a profit by simultaneously buying both call and put options in any of the scenario(s)? Explain your answer and determine the exchange rates at which the trader may profit. (2 marks) Scenario Eje 1 1.40 1.50 3 1.566 1.608 1.65 6. 1.70 7 1.80 Q1) Assume that a trader buys a Euro futures contract of €125,000 at the per-unit price of $1.6012/€ on day 1. Assume that the trader needs to post a margin of $3250 for this contract and the maintenance level is $2500. Finally, assume that this contract expires/matures on day 5. Margin Margin Adjustment Contribution Account Day Action Futures Contract Margin Unit Price Price ($/E) or Withdrawal 1 Buy $1.6012/€ ? +$3250 $3250 2 Settle $1.5976/€ $199,700 ? Settle ? $199,300 ? 4 Settle $1.6040/€ $200,500 ? Settle ? ? ? $4950 Position: Long; Contract size: €125,000; Margin: 3250; Maintenance level: 2500 a) Given the information in the table above, fill in the blanks (1 mark) b) How many dollars does the trader pay to buy €125,000 at the end of day 5? What is the "effective per unit price" that the trader pays for the contract? Explain. (1 mark) c) Assume that on day 1, the trader was contemplating negotiating a forward contract written on €125,000 at a rate of $1.6012/€. Offer an explanation for the trader choosing to enter into the futures contract instead. (1 mark) d) Now suppose that on day 1, the following instruments are available to the trader: = 1.608 and a premium of (1) European call options on the EUR, with a strike price of Esje $0.05/€, and; (2) European put options on the EUR, with a strike price of Es/e = 1.608 and a premium of $0.03/€ Both contracts are written on €125,000 and expire on day 5. The table below shows seven different scenarios that correspond to the expectation (as on day 1) of the spot exchange rate on day 5. Is it possible for the trader to make a profit by simultaneously buying both call and put options in any of the scenario(s)? Explain your answer and determine the exchange rates at which the trader may profit. (2 marks) Scenario Eje 1 1.40 1.50 3 1.566 1.608 1.65 6. 1.70 7 1.80