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Questions and Answers
What is the primary outcome of cash and carry arbitrage on 31 December based on the given portfolio value?
What is the primary outcome of cash and carry arbitrage on 31 December based on the given portfolio value?
In the calculation of financing the portfolio, what value is used for the principal amount?
In the calculation of financing the portfolio, what value is used for the principal amount?
What does the term 'financing of the portfolio' refer to in the context of cash and carry arbitrage?
What does the term 'financing of the portfolio' refer to in the context of cash and carry arbitrage?
What is the theoretical basis for the possible cash and carry arbitrage as mentioned?
What is the theoretical basis for the possible cash and carry arbitrage as mentioned?
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How is the interest from the futures market calculated in the context of the provided scenario?
How is the interest from the futures market calculated in the context of the provided scenario?
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What is the initial decision made by the agent on January 3 regarding futures contracts?
What is the initial decision made by the agent on January 3 regarding futures contracts?
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What could potentially lead to a profit from the transaction analysis on 31 January?
What could potentially lead to a profit from the transaction analysis on 31 January?
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What price does the agent sell the July contract for on February 15?
What price does the agent sell the July contract for on February 15?
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Which aspect of investment risk is primarily addressed by the arbitrage strategies mentioned?
Which aspect of investment risk is primarily addressed by the arbitrage strategies mentioned?
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How much profit does the agent make from the July contract after unwinding the position?
How much profit does the agent make from the July contract after unwinding the position?
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What is the main role of transactions costs in the context of arbitrage strategies?
What is the main role of transactions costs in the context of arbitrage strategies?
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What key risk factor might affect the agent's arbitrage strategy?
What key risk factor might affect the agent's arbitrage strategy?
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What is the price of the July contract on January 3?
What is the price of the July contract on January 3?
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What does the term 'intertemporal arbitrage' refer to?
What does the term 'intertemporal arbitrage' refer to?
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Which of the following represents a strategy for limiting transaction costs in futures trading?
Which of the following represents a strategy for limiting transaction costs in futures trading?
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What might happen to futures prices between the time of initiating an arbitrage position and unwinding it?
What might happen to futures prices between the time of initiating an arbitrage position and unwinding it?
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What is the purpose of a margin call in trading futures contracts?
What is the purpose of a margin call in trading futures contracts?
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In a cross hedging operation, which of the following is typically involved?
In a cross hedging operation, which of the following is typically involved?
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What would be the total investment in an oil contract bought for USD 85.50 per unit with a total of 1,000 units?
What would be the total investment in an oil contract bought for USD 85.50 per unit with a total of 1,000 units?
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Which of the following best describes 'transaction costs' in futures trading?
Which of the following best describes 'transaction costs' in futures trading?
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During which period was a margin call of USD 1,700 made after a cumulative loss of USD 2,800?
During which period was a margin call of USD 1,700 made after a cumulative loss of USD 2,800?
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What is typically required in order to maintain a futures contract position?
What is typically required in order to maintain a futures contract position?
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What can be a consequence of not meeting a margin call in futures trading?
What can be a consequence of not meeting a margin call in futures trading?
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Which statement accurately reflects investment risk factors in futures trading?
Which statement accurately reflects investment risk factors in futures trading?
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Study Notes
Falling Prices
- Placement of creditor margins: (1/2) x (45.60 – 38.98) x 100 x 5 x 6% x (8/360) = € 2.21
- Margin account: 3,310 + 2.21 – 3 - 40 = € 3,269.21
Rising Prices
- Financing of debtor margins: (1/2) x (48.20 – 45.60) x 100 x 5 x 6% x (8/360) = € 0.87
- Margin account: 1,300 + 0.87 + 40 + 3 = € 1,343.87
Cash and Carry Arbitrage
- Theoretical value of CAC 40 for January maturity: Calculated using Spot price, risk free rate, and dividend yield
- December 31: Buy a replicating portfolio of the index CAC 40 at €222,560 and sell futures contracts
- January 31: Sell the replicating portfolio of the index CAC 40 at €220,690
- January 31: The total gain includes the profit on futures, interest earned on the proceeds of the sale of the portfolio, minus the cost of financing the portfolio and the initial investment
Intertemporal Arbitrage
- January 3: Sell a contract for May at €1,350, buy a contract for July at €1,260
- February 15: Buy a contract for May at €1,350, sell a contract for July at €1,450
- Profit: The agent makes a profit of €190 on the July contract
Cross-Hedging
- Hedging: Reducing risk by taking a position in a related asset to offset potential losses
- Example: A company that produces kerosene may hedge against fluctuations in fuel oil prices by selling fuel oil futures contracts
- Procedure: In the example above, the company sells fuel oil contracts at time 't' and buys them back at time 't+3', while doing the opposite for kerosene
Margin Calls
- Example: A trader buys an oil contract for March delivery at USD 85.50
- Initial margin: USD 4,000 paid when the contract is bought
- Maintenance margin: USD 2,800, the minimum amount that must be maintained in the margin account
- Margin call: If the margin account falls below the maintenance margin, a margin call is issued, requiring the trader to deposit additional funds
- The trader may have to pay margin calls multiple times if the price of the oil contract continues to fall
- Profit: The trader makes a profit if the price of the oil contract rises and the trader unwinds the position before the expiration date
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Description
This quiz explores concepts related to margin calculations during falling and rising prices, as well as principles of cash and carry arbitrage. It includes detailed scenarios involving financial calculations and strategic decision-making in trading contexts. Test your understanding of these essential financial concepts.
