Transcript HW1. Due back on Thursday, December 5. From the text book:

HW1. Due back on Thursday, December 5.
From the text book:
Q: 1.28, 1.32, 2.4, 2.11, 3.8 and 3.10.
In addition:
Based on the following definitions, data and the operations described in slide 2, 3, 4 and 5 below, fill in the blanks in tables 1 and 2.
All purchases and sales are assumed, for simplicity, to take place at the
settlement price on the day of the trade. The required initial and maintenance margins
per contract are as follows:
Initial
Maintenance
Spot-month
$ 3,000
$ 2,100
Non-spot month
$ 2,000
$ 1,400
Table 1 shows the daily settlement prices for the May and June futures contracts,
and computes the daily gains and losses on the customer's futures and positions. The
gains and losses are both realized and unrealized. Realized gains and losses are those
resulting from actual purchases and sales. Unrealized gains and losses are incurred
because the account is revalued every day, or marked to market losses each day.
(Readers should be able to calculate these losses and gains. Hint: each futures contract
requires the delivery of 42,000 gallons of gasoline.)
Table 2 shows the customer’s daily margin account. It assumes that the account
is opened on April 3 with a deposit of $5,000, in anticipation of making future trades,
and it provides the daily transactions made in the margin account, from April 3 through
April 24, because of the following transactions:
April 3
Customer purchases 2 May contracts resulting in an initial margin call for $1000, which
is the difference between the customer’s $5000 deposit on the previous day and the
initial margin requirement of $6000 (3000 x 2 = $6000).
April 4
Customer responds to the margin call and deposits $1000. His account experiences an
unrealized gain of $1352.40 during the day, bringing his equity to $ 7352.40. Since the
equity is above the initial margin requirement, the customer is entitled to withdraw cash
if he wishes, but he does not.
April 5
A substantial drop in gasoline prices result in an unrealized loss of $ 2545.20. The
equity falls to $4807.20. Since total equity is still above the $4200 ($2100 x 2)
maintenance margin level, no margin call is issued.
April 6
Gasoline prices continue to decline, resulting in another loss of $1579.20, further
reducing equity to $ 3228.00. Since equity is now less than the required maintenance
margin of $4200, a variation margin call is issued for $2772 ($6000-$3228 = $2772),
bringing the equity in the account back to the initial $6000 required margin level.
April 7
Customer answers the margin call by depositing $2772. Gasoline prices make a slight
recovery. Equity rises to $6336.
April 10
The price of gasoline continues to rise. The customer’s equity increases to $8301.60.
He requests that the broker pay him the excess in his margin account, which is $2301.60
(the difference between the initial required margin of $6000 and the current equity of
$8301.60).
April 11
Gasoline prices increase. The customer has an unrealized gain of $1436.40, bringing
the equity in the account to $7436.40.
April 12
The customer liquidates his position by selling 2 May contracts at 70.11 cents per
gallon, realizing a gain for that day of $932.40. His equity rises to $8368.80. The
columns on the right side of Table 2 show this cumulative performance up to this date:
he has a net profit of $1898.40.
April 13
The customer withdraws $3368.80 from his account, leaving only the $5000 he
originally used to open his account.
April 18
Customer sells 4 June contracts, requiring an initial margin of $8000 ($2000 x 4).
Hence, a margin call of $3000 is issued ($8000 - $5000 = $3000).
April 19
Customer meets his margin call by depositing $3000. An increase in gasoline prices
results in an unrealized loss of $1512.00. The account equity is still above the required
$5600 ($1400 x 4) maintenance level, so no margin call is issued.
April 20
Gasoline prices continue to surge, causing a further loss of $1898.40. Equity
falls to $4589.60, resulting in the broker issuing a margin call for $3410.40 to
restore the account equity to the initial required margin level of $8000 ($8000
- $4589.60 = $3410.40).
April 21
The customer cannot meet the margin call and decides to offset his position by
buying 4 June contracts at 71.18 cents per gallon, for a gain of $302.40. His
remaining equity is $4892, which he requests be paid to him. For the entire
month, the customer’s trading activity has resulted in a net loss of $1209.60.
Table 1:
Daily gains and losses and cumulative trading profits and losses- unleaded gasoline, April 3 to April 28
May Contract
(spot month)
Trade
price
3
4
5
6
7
10
11
12
13
14
17
18
19
20
21
24
25
26
27
28
2871.22
cent/gallon
67.85
70.11
Settlement
price
cent/gallon
67.85
69.46
66.43
64.55
64.95
67.29
69.00
70.11
68.81
70.02
72.08
73.86
74.62
74.65
74.16
72.23
76.16
78.12
78.12
74.12
June Contract
(non-spot month)
Cumulative
Profit/loss
Trade
price
Settlement
price
Marked to Market
cash flows
Unrealized
Realized
cent/gallon
cent/gallon
65.00
65.93
63.93
62.46
62.89
64.41
65.91
66.84
65.81
66.54
68.21
69.33
70.23
71.36
71.18
69.18
71.38
72.33
72.27
71.22
$
$
$
69.33
71.18
--+1,352.40
--+1,352.40
-----
Table 2:
Margin account and account equity -- unleaded gasoline, April 3 to April 24
April
3
4
5
6
7
10
11
12
13
14
17
18
19
20
21
24
Transactions
Deposit $5,000
Bought 2 May
Deposit $1,000
Beginning
$
0
Equity
Cash flow*
$
+5,000
Ending
$
5,000.00
Margin Call
$
---
Margin account
Deficiency
$
---
Excess
$
5,000.00
Deposit $2,772
Withdraw $2,301.60
Sold 2 May
Withdraw $3,368.80
Sold 4 June
Deposit $3,000
Bought 4 June
Withdraw $4,892
* Marked to Market cash flows from Table
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