Explanation:

a) Hedging the oil exposure will require us to short the oil futures since oil prices fall may result in huge losses while selling the oil barrels.

b)

9/1 = $ 60

10/1 = $

71.3

13/1

= $ 65.4

14/1 =$

63.25

15/1

= $ 61.75

16/1

= $ 58.15

17/1

= $ 54.26

20/1

= $ 52.58

21/1

= $ 43.16

22/1

= $49.20

23/1

= $ 36.89

24/1

= $ 15.28

A per

future amount has been used to give the above margin calls. However, 100

futures is the original amount bought.

c) Usually,

the threshold price is lower than the futures' price with which they were

bought using the margin. Whenever that price is reached or touched, the margin

call is raised by the broker and within a short time, the margin used will have

to be paid up or the broker will square off the position automatically, an

action which will lead to loss which we may bear. Consequently, the current

futures bought through margin call has a threshold of 20 percent lesser or

lower than when they were actually bought:

The threshold price for the current futures that are bought via margin call would be

The

Threshold price = 80 % *$60= $ 48 / barrel of oil

d)

The total loss that will result from the futures contract = $ 6000 - $ 4920 = $

1,080

e) 30

% of the margin call contracts can be kept other than which can be squared off

by the broker

This

means that Remaining contracts = 100 * 30 % = 30 Future contracts of oil would

be left when the margin call has not been paid duly.

f)

The loss that will be incurred from the future strategy in case the margin call

is not met and 70 % of the contracts are squared off on 14/1 when the future

price is at $ 63.25 is calculated as follows,

Amount

of the 70 % of the contracts sold = $ 63.25 * 70 = $ 4,427.5

Amount

bought for = $ 60 * 100 = $ 6,000

Remaining

amount sold for = $ 49.2 * 30 = $ 1,476

Net (Loss)

= ( $ 4,427.5 + 1,476 ) - $ 6,000 = ( $ 96.5 )

and this is a Loss

g)

The minimum amount = $ 6000 * 70% = $ 4,200

5

percent is the de facto leverage of the futures strategy. This means that when

the oil prices by 1 % there would be a 5

% change in the investment on the same.

h) This

normally varies from broker to broker. However, one common thing is that all

brokers will require a minimum amount which is equivalent to 25% to be set

aside so as to meet the requirements of the margin call. Every broker sets this

as the base. In their own discretion, brokers can increase this amount to above

25% based on their respective business requirements and client's portfolio.