Scanned Documents (8)

Forward Contract

One side agreement to buy or sell an asset at a predetermined price at a specific time in the future.

Spot Price

The price for immediate delivery of an asset.

Futures Contract

A standardized contract traded on exchanges to buy or sell an asset at a future date for a set price.

Margin Call

A demand by a broker for an investor to deposit additional money or securities to cover possible losses.

Hedging

A risk management strategy used to offset potential losses in investments.

Optimal Hedge Ratio

The ratio used to determine the ideal amount of futures contracts needed to hedge a position.

Present Value (PV)

The current value of a future sum of money given a specified rate of return.

Continuous Compounding

The process of earning interest on interest continuously rather than at discrete intervals.

Effective Price

The actual price paid after taking into account hedging gains or losses.

Delivery Initiate

In a futures contract, the delivery is initiated by the party with the short position.

An investor buys two futures contract an asset when the futures price is $1,500. Each contract is on 100 units of the asset. The contract is closed out when the futures price is $1,520. Which of the following is true?

The investor has made a gain of $4,000. Buys-long position. Sells-short position

The frequency with which futures margin accounts are adjusted for gains and losses is

Daily

A company enters into a long futures contract to sell 50,000 units of a commodity for 70 cents per unit.
The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit below which there will be a margin call?

68 cents

A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn

62

Who initiates delivery in a commodity futures contract?

The party with a short position. Seller

On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company?

59.50