Question 4

a. It is August 20th, and you have just entered a long position in a futures contract. The contract expires on December 20th and calls for the delivery of 600 tons of a commodity. Further, because this is a futures position, it requires posting 35% of the current futures price as the initial margin. The maintenance margin is 20% of the current futures price. Assume that the account is marked to market monthly. The following represent the contract delivery prices (in dollars per ton) that prevail on each settlement date:

August 20th (initiation) $340.00

September 20th 343.55

October 20th 324.00

November 20th 328.00

December 20th (delivery) 324.50

Required:

i. Calculate the equity value of your margin account on each settlement date, including any additional equity required to meet a margin call. Also, compute the amount of cash that will be returned to you on December 20th.

ii. Calculate the leverage multiplier for the contract.

iii. Calculate each month's cumulative total holding period returns and cumulative spot holding period returns.

iv. If the investment pays no dividend and requires a storage cost of 2 per cent per annum (of current value), calculate the current (i.e., August 20th) implied spot price for a ton of the commodity and the November 20th implied price for the same ton. In your calculations, assume that an annual risk- free rate of 5 per cent prevails over the entire contract life.

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