The buyer and the seller of a future on Monday with an underlying value of 90,000 are
Question:
The buyer and the seller of a future on Monday with an underlying value of 90,000 are both required to provide an initial margin of 10 percent, assuming that counterparties have to keep all of the initial margins permanently as a buffer (i.e. the maintenance margin will always be equal to the initial margin).
a. Calculate the variation margins and the accumulated profit/loss if the price of the underlying asset changes as presented in the table.
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b) Calculate the return and the % return for the holding period (Monday to Friday) for the seller of this future based on the above information.
c) Explain what is meant by 'gearing returns' with reference to this example. (Hint: gearing has the same meaning as leverage, note how the returns in the Imaginationum are amplified in the futures contract and comment on it.)