Chapter 22 - Futures Markets
CHAPTER22:FUTURESMARKETS
PROBLEMSETS
1.
Thereislittlehedgingorspeculativedemandforcementfutures,sincecementpricesare
[Link]
wouldnotmaterialize.
2.
[Link]
[Link]
commodities,forwhichthefuturesmarketisfarmoreliquidthanthespotmarket.
3.
Shortsellingresultsinanimmediatecashinflow,whereastheshortfuturesposition
doesnot:
Action
InitialCF
ShortSale
ShortFutures
4.
a.
+P0
0
FinalCF
PT
F0PT
[Link],thefuturespricewillbelowerwhen
[Link]:
F0=S0(1+rfd)T
b.
[Link]
price,theinterestrate,andthedividendyield;itisnotafunctionofbeta.
c.
[Link]
betaposition.
5.
[Link]
isfair,thenthevalueoftheagreementoughttobezero;thatis,thecontractwillbea
zeroNPVagreementforeachtrader.
6.
Becauselongpositionsequalshortpositions,futurestradingmustentailacanceling
[Link],nocashisexchangedattheinceptionoffutures
[Link],thereshouldbeminimalimpactonthespotmarketfortheasset,and
futurestradingshouldnotbeexpectedtoreducecapitalavailableforotheruses.
22-1
Chapter 22 - Futures Markets
7.
a.
TheclosingfuturespricefortheMarchcontractwas1,477.20,whichhasadollar
valueof:
$2501,477.20=$369,300
Therefore,therequiredmargindepositis:$36,930
b.
Thefuturespriceincreasesby:1,500.001,477.20=22.80
Thecredittoyourmarginaccountwouldbe:22.80$250=$5,700
Thisisapercentgainof:$5,700/$36,930=0.1543=15.43%
Notethatthefuturespriceitselfincreasedbyonly1.543%.
8.
c.
Followingthereasoninginpart(b),anychangeinFismagnifiedbyaratioof
(l/marginrequirement).Thisistheleverageeffect.Thereturnwillbe10%.
a.
F0=S0(1+rf)=$1501.06=$159
b. F0=S0(1+rf)3=$1501.063=$178.65
9.
c.
F0=1501.083=$188.96
a.
TakeashortpositioninTbondfutures,[Link],
thelossonthebondwillbeoffsettosomeextentbygainsonthefutures.
b.
Again,ashortpositioninTbondfutureswilloffsettheinterestraterisk.
c.
[Link]
increase,[Link],youshouldtakea
longfuturespositionthatwillgenerateaprofitifpricesincrease.
10.
F0=S0(l+rfd)=1,500(1+0.050.02)=1,545
11.
Theputcallparityrelationstatesthat:
P=CS0+X/(1+rf)T
IfX=F,then:P=CS0+F/(1+rf)T
Butspotfuturesparitytellsusthat:
F=S0(1+rf)T
Substituting,wefindthat:
P=CS0+[S0(1+rf)T]/(1+rf)T=CS0+S0whichimpliesthatP=C.
22-2
Chapter 22 - Futures Markets
12.
Accordingtotheparityrelation,theproperpriceforDecemberfuturesis:
FDec=FJune(l+rf)1/2=846.301.051/2=867.20
[Link]
alongpositionintheDecembercontractandshorttheJunecontract.
13.
a.
1201.06=$127.20
b.
Thestockpricefallsto:120(10.03)=$116.40
Thefuturespricefallsto:116.41.06=$123.384
Theinvestorloses:(127.20123.384)1,000=$3,816
14.
c.
Thepercentagelossis:$3,816/$12,000=0.318=31.8%
a.
TheinitialfuturespriceisF0=1300(1+0.0050.002)12=$1,347.58
Inonemonth,thefuturespricewillbe:
F0=1320(1+0.0050.002)11=$1,364.22
Theincreaseinthefuturespriceis16.64,sothecashflowwillbe:
16.64$250=$4,160.00
b.
Theholdingperiodreturnis:$4,160.00/$13,000=0.3200=32.00%
15.
Thetreasurerwouldliketobuythebondstoday,[Link]
purchase,[Link],thetreasurer
willhavetobuybackthebondsforthesinkingfundatpriceshigherthanthepricesat
[Link],thegainsonthefuturescontractswill
offsetthishighercosttosomeextent.
16.
TheparityvalueofFis:1,300(1+0.040.01)=1,339
Theactualfuturespriceis1,330,toolowby9.
ArbitragePortfolio
CFnow
CFin1year
ShortIndex
BuyFutures
Lend
1,300
0
1,300
ST(0.011,300)
ST1,330
1,3001.04
Total
22-3
Chapter 22 - Futures Markets
17.
a.
Futurespricesaredeterminedfromthespreadsheetasfollows:
Spot Futures Parity and Time Spreads
Spot price
1,500
Income yield (%)
1.5 Futures prices versus maturity
Interest rate (%)
3.0
Today's date
1/1/2008 Spot price
1,500.00
Maturity date 1
2/14/2008 Futures 1
1,502.67
Maturity date 2
5/21/2008 Futures 2
1,508.71
Maturity date 3
11/18/2008 Futures 3
1,519.79
Time to maturity 1
Time to maturity 2
Time to maturity 3
0.12
0.39
0.88
LEGEND:
Enter data
Value calculated
See comment
b.
Thespreadsheetdemonstratesthatthefuturespricesnowdecreasewithincreased
timetomaturity:
Spot Futures Parity and Time Spreads
Spot price
1,500
Income yield (%)
4.0 Futures prices versus maturity
Interest rate (%)
3.0
Today's date
1/1/2008 Spot price
1,500.00
Maturity date 1
2/14/2008 Futures 1
1,498.20
Maturity date 2
5/21/2008 Futures 2
1,494.15
Maturity date 3
11/18/2008 Futures 3
1,486.78
Time to maturity 1
Time to maturity 2
Time to maturity 3
0.12
0.39
0.88
LEGEND:
Enter data
Value calculated
See comment
18.
a.
ThecurrentyieldforTreasurybonds(coupondividedbyprice)playstheroleofthe
dividendyield.
b.
Whentheyieldcurveisupwardsloping,thecurrentyieldexceedstheshortrate.
Hence,Tbondfuturespricesonmoredistantcontractsarelowerthanthoseon
neartermcontracts.
22-4
Chapter 22 - Futures Markets
19.
a.
Action
CashFlows
T1
Now
LongfutureswithmaturityT1
ShortfutureswithmaturityT2
BuyassetatT1,sellatT2
AtT1,borrowF(T1)
0
0
0
0
P1F(T1)
Total
T2
0
F(T2)P2
+P2
0
P1
F(T1)
(T2T1)
F(T1)(1+rf)
(T2T1)
F(T2)F(T1)(1+rf)
b.
SincetheT2cashflowisrisklessandthenetinvestmentwaszero,thenanyprofits
representanarbitrageopportunity.
c.
Thezeroprofitnoarbitragerestrictionimpliesthat
F(T2)=F(T1)(1+rf)(T T )
2
CFAPROBLEMS
1.
a.
Thestrategythatwouldtakeadvantageofthearbitrageopportunityisareversecash
[Link]
relationshipdoesnotholdtrue:
F0S0(1+C)
Ifthefuturespriceislessthanthespotpriceplusthecostofcarryingthegoodstothe
futuresdeliverydate,[Link]
theassetshort,usetheproceedstolendattheprevailinginterestrate,andthenbuythe
[Link],thetraderwouldthencollectthe
proceedsoftheloanwithinterest,acceptdeliveryoftheasset,andcovertheshort
positioninthecommodity.
b.
CashFlows
Action
Now
Oneyearfromnow
Sellthespotcommodityshort
+$120.00
Buythecommodityfuturesexpiringin1year
$0.00
Contracttolend$120at8%for1year
$120.00
$125.00
$0.00
+$129.60
Totalcashflow
+$4.60
$0.00
22-5
Chapter 22 - Futures Markets
2.
3.
a.
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invalue,thenthecompanycanbuyfrancsforagivennumberofdollarstoservice
itsdebt,[Link],
thecompanywillbenefitfromthechangeintheexchangerate.
[Link]
[Link]
majordifferencefromthefirmsperspectivebetweenfuturesandforwardsisinthe
[Link]
readyforthecashmanagementissuessurroundingcashinflowsoroutflowsasthe
currencyvaluesandfuturespricesfluctuate.
b.
Thecalloptiongivesthecompanytheabilitytobenefitfromdepreciationinthe
franc,[Link]
expertiseincurrencyspeculation,itseemsthatthefuturesorforwardstrategy,which
locksinadollarcostoffinancingwithoutanoptionpremium,maybethebetter
strategy.
Theimportantdistinctionbetweenafuturescontractandanoptionscontractisthatthe
[Link],the
investorhasanobligationtoeitheracceptordeliver,respectively,theunderlyingcommodity
[Link],thebuyerofanoptioncontractisnotobligatedtoaccept
ordelivertheunderlyingcommoditybutinsteadhastheright,orchoice,toacceptdelivery
(forcallholders)ormakedelivery(forputholders)oftheunderlyingcommodityanytime
duringthelifeofthecontract.
[Link]
[Link]
[Link],theadditionofacallorput
optiontoaportfoliodoesnotaffectaportfoliosupsideriskanddownsiderisktoasimilar
[Link],theimpactofoptionsontheriskprofileofaportfolio
isasymmetric.
4.
a. Theinvestorshouldselltheforwardcontracttoprotectthevalueofthebondagainst
[Link]
longpositionintheunderlyingasset,thehedgerequiresashortpositioninthe
derivativeinstrument.
b.
Thevalueoftheforwardcontractonexpirationdateisequaltothespotpriceofthe
underlyingassetonexpirationdateminustheforwardpriceofthecontract:
$978.40$1,024.70=$46.30
[Link]
[Link],theinvestorshouldbeshorttheforward
contract,sothatthevaluetothisinvestorwouldbe+$46.30sincethisisthecashflow
theinvestorexpectstoreceive.
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Chapter 22 - Futures Markets
22-7
Chapter 22 - Futures Markets
c.
Thevalueofthecombinedportfolioattheendofthesixmonthholdingperiodis:
$978.40+$46.30=$1,024.70
Thechangeinthevalueofthecombinedportfolioduringthissixmonthperiodis:
$24.70
Thevalueofthecombinedportfolioisthesumofthemarketvalueofthebond
[Link]
monthholdingperiod,thebondisworth$1,000andtheforwardcontracthasa
valueofzero(becausethisisnotanoffmarketforwardcontract,nomoney
changeshandsatinitiation).Sixmonthslater,thebondvalueis$978.40andthe
valueoftheshortpositionintheforwardcontractis$46.30,ascalculatedinpart
(b).
Thefactthatthecombinedvalueofthelongpositioninthebondandtheshort
positionintheforwardcontractattheforwardcontractsmaturitydateisequalto
theforwardpriceontheforwardcontractatitsinitiationdateisnotacoincidence.
Bytakingalongpositionintheunderlyingassetandashortpositioninthe
forwardcontract,theinvestorhascreatedafullyhedged(andhenceriskfree)
position,[Link]
ofreturnis5.00%(annualized),whichproducesareturnof$24.70overasix
monthperiod:
($1,0001.05(1/2))$1,000=$24.70
TheseresultssupportVanHusensstatementthatsellingaforwardcontractonthe
[Link]
inthevalueoftheunderlyingbondduringthesixmonthholdingperiodisoffsetby
thecashpaymentmadeatexpirationdatetotheholderoftheshortpositioninthe
forwardcontract;thatis,ashortpositionintheforwardcontractprotects(hedges)the
longpositionintheunderlyingasset.
5.
a.
[Link]
onabondfuturescontractduringaperiodofrisinginterestrates(decliningbond
prices)[Link]
afuturescontracthasalongpositionwhenthepriceoftheunderlyingassetincreases,
thenthedailymarktomarketgeneratesapositivecashinflowthatcanbereinvested.
Forwardcontractssettleonlyatexpirationdateanddonotgenerateanycashflow
priortoexpiration.
22-8
Chapter 22 - Futures Markets
b.
[Link],thefuturescontractpriceisadjusted
[Link](andotherfinancial
instruments),however,[Link],thecost
ofcarryisreducedbyanycouponpaymentspaidtothebondholderduringthelifeof
[Link]
[Link],thecostofcarryforabondislikelytobe
negative.
22-9