(a) A farmer shorts cocoa futures for 100 metric tons at $200 per metric ton. The exchange...
Question:
(a) A farmer shorts cocoa futures for 100 metric tons at $200 per metric ton. The exchange requires a 20% initial margin. Meanwhile, the maintenance margin is 70% of the initial margin. What price change per metric ton would lead to a margin call?
(b) You currently hold a portfolio of Malaysian stocks worth RM2,187,500. You anticipate that in the coming 3 months there will be volatility in equity markets. As such, you would like to completely hedge your portfolio of stocks. Use the following information to answer the questions.
Beta of your portfolio = 1.2
Spot index value (FBM KLCI) = 1,750
Risk-free rate = 4% per annum 3-month SIF contract = 1,767.24 points
Expected dividend yield = 0%
i. How many SIF contracts should you use to fully hedge your portfolio?
ii. Outline the hedge strategy and show the resulting portfolio value assuming that the market falls by 10% by futures maturity.
Foundations of Finance The Logic and Practice of Financial Management
ISBN: 978-0132994873
8th edition
Authors: Arthur J. Keown, John D. Martin, J. William Petty