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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?

A profit of €6,000

A breakeven situation

A gain of €3,566 (correct)

A loss of €1,870

In the calculation of financing the portfolio, what value is used for the principal amount?

€4,571.35

€4,530.12

€220,690

€222,560 (correct)

What does the term 'financing of the portfolio' refer to in the context of cash and carry arbitrage?

The total costs incurred in buying the futures

The expected income from dividends on stocks

The revenue generated from short selling

The interest expense on the portfolio value (correct)

What is the theoretical basis for the possible cash and carry arbitrage as mentioned?

Difference in spot and futures prices Signup and view all the answers

How is the interest from the futures market calculated in the context of the provided scenario?

On the difference between futures and spot prices Signup and view all the answers

What is the initial decision made by the agent on January 3 regarding futures contracts?

Sell a contract for May at 1,350 and buy a contract for July at 1,260 Signup and view all the answers

What could potentially lead to a profit from the transaction analysis on 31 January?

An increase in the CAC 40 index Signup and view all the answers

What price does the agent sell the July contract for on February 15?

1,450 Signup and view all the answers

Which aspect of investment risk is primarily addressed by the arbitrage strategies mentioned?

Market volatility Signup and view all the answers

How much profit does the agent make from the July contract after unwinding the position?

190 Signup and view all the answers

What is the main role of transactions costs in the context of arbitrage strategies?

To determine the feasibility of the arbitrage opportunity Signup and view all the answers

What key risk factor might affect the agent's arbitrage strategy?

Price volatility Signup and view all the answers

What is the price of the July contract on January 3?

1,260 Signup and view all the answers

What does the term 'intertemporal arbitrage' refer to?

Exploiting price differences of the same commodity over different time periods Signup and view all the answers

Which of the following represents a strategy for limiting transaction costs in futures trading?

Consolidating trades to minimize execution fees Signup and view all the answers

What might happen to futures prices between the time of initiating an arbitrage position and unwinding it?

They may rise Signup and view all the answers

What is the purpose of a margin call in trading futures contracts?

To cover daily losses and maintain required margin levels Signup and view all the answers

In a cross hedging operation, which of the following is typically involved?

Hedging one asset using a related but different asset Signup and view all the answers

What would be the total investment in an oil contract bought for USD 85.50 per unit with a total of 1,000 units?

USD 85,500 Signup and view all the answers

Which of the following best describes 'transaction costs' in futures trading?

Fees and commissions incurred while buying and selling contracts Signup and view all the answers

During which period was a margin call of USD 1,700 made after a cumulative loss of USD 2,800?

January 17 Signup and view all the answers

What is typically required in order to maintain a futures contract position?

Maintenance of the minimum margin level Signup and view all the answers

What can be a consequence of not meeting a margin call in futures trading?

Forced liquidation of the position by the broker Signup and view all the answers

Which statement accurately reflects investment risk factors in futures trading?

Increased leverage can magnify both gains and losses Signup and view all the answers

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.