Today, you just entered futures contract on Treasury bond with face value $100,000, at an initial futures
Question:
Today, you just entered futures contract on Treasury bond with face value $100,000, at an initial futures price 108.3750% of the total face value. Suppose the market futures price for the next 4 days are given below, quoted as percentage of the total face value.
Day Futures price
0 108.3750%
1 106.5000%
2 108.6250%
3 110.2500%
4 112.0625%
(a) Suppose you are the long side and hold the futures contract for 4 days. Calculate the daily gains/losses for each of the coming 4 days. Calculate the cumulative gains/losses for the 4 days.
(b) Suppose you are the short side and hold the futures contract for 4 days. Calculate the daily gains/losses for each of the coming 4 days. Calculate the cumulative gains/losses for the 4 days.
(c) Suppose contract will mature in exactly 4 days. What is the spot price (as percentage of the face value) of the bond in 4 days? What is the total dollar payoff to you at the maturity date? (note: in this case, the futures is settled at maturity)
(d) Suppose contract will mature in exactly 4 days. What is the total dollar payoff to you at the maturity date? (note: in this case, the futures is settled at maturity)
(e) Suppose the initial margin of the futures contract is 40% of the initial value of futures contract (ie, 40% × 108.375% × 100, 000), and you put exactly this amount in the trading account. What is your net return in percentage for the 4 days?
(f) Suppose the initial margin of the futures contract is 100% of the initial value of futures contract (ie, 100% × 108.375% × 100, 000), and you put exactly this amount in the trading account. What is your net return in percentage for the 4 days?
(g) Suppose the initial margin of the futures contract is 40% of the initial value of futures contract (ie, 40% × 108.375% × 100, 000), and you put exactly this amount in the trading account. What is your net return in percentage for the 4 days?
(h) Suppose the initial margin of the futures contract is 100% of the initial value of futures contract (ie, 100% × 108.375% × 100, 000), and you put exactly this amount in the trading account. What is your net return in percentage for the 4 days?
(i) Based on your result from (e), (f), (g) and (h), if we define leverage = 100% 40% . Calculate the following two ratios: ratio1 = result in (e) result in (f) , and ratio2 = result in (g) result in (h) . Compare the two ratios with leverage, what do you find regarding the functionality of initial margin?
Fundamentals Of Corporate Finance
ISBN: 9781265553609
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan