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Sir I am unable to understand how year 4 is calculated here. Please guide me through this calculation.
Its Q no 4 from June 15.
(i) Futures contracts will be marked-to-market daily. The CEO wondered what the impact of this would be if 50 futures contracts were bought at 95·84 on 1 June and 30 futures contracts were sold at 95·61 on 3 June, based on the $ December futures contract given above. The closing settlement prices are given below for four days:
Date
1 June 2 June 3 June 4 June
Settlement price
95·84. 95·76 95·66 95·74
(ii) Daikon
and this margin will need to be adjusted when the contracts are marked-to-market daily.
Co will need to deposit funds into a margin account with a broker for each contract they have opened,
(iii) It is unlikely that option contracts will be exercised at the end of the hedge period unless they have reached expiry. Instead, they more likely to be sold and the positions closed.
Required:
Discuss the impact on Daikon Co of each of the three further issues given above. As part of the discussion, include the calculations of the daily impact of the mark-to-market closing prices on the transactions specified by the CEO. (10 marks)I guess you are referring to 4th June (not year 4 🙂 )
From day to day the price of the futures will change, and although the final profit or loss on the futures will only be transferred at the end of the deal, the deposit (margin) is increased or decreased from day to day as the futures are showing a profit or a loss.
On 3rd June the futures price is 95.66, and on 4th June the price is 95.74, and so there is a profit on that day of 95.74 – 95.66 = 0.08 (or 8 basis points).
They have 20 contracts (they started with 50 but had sold 30) and so the profit on the day is 20 contracts x 0.08 x $1M contract size x 1/400 = $4,000.
(or, if you prefer to work in ticks, 20 contracts x 8 ticks x $25 = $4,000)
Since they are making a profit on that day, the deposit/margin will be reduced by $4,000.
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sir john the question is as follows
(1) how do u know the # of contracts remaing ? i am able to calculate the 2 june loss of 10000 and 3 june 12500 but dint understand the +0.5 basis points and the calulation of # of contracts remaining e.g started from 50 but at 3 june it was 50 contract and then 30 and then on 4 june only 20.
With regard to the number of contracts, the question says that they buy 50 on 1 June and sell 30 on 3 June. That means that they then have 20 contracts left.
I don’t know which 0.5 basis points you are referring to. However on 3 June they will need to increase the margin by 12,500 as you have calculated, and in addition pay in the loss on the 30 contracts sold which is 95.61 – 95.66 = 0.05 or 5 basis points.
On 4 June, since they only have 20 contracts remaining, they will reduce the margin by the increase in price of 95.74 – 95.66 = 0.08 or 8 basis points.
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