The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

a. Howard is long cotton futures.

b. Jill is short cocoa.

3. Seramsis Corp. is looking to buy 250 tons of coal, which they need right away.

a. Would Seramsis look to buy this on the spot market or the futures market?

b. Is Seramsis speculating, hedging, both, or neither?

4. Cattarauqua Ginseng Enterprises sells herbal supplements. The company has a large number of Korean customers.
   The company is concerned that the value of the Korean won (the unit of currency) may decline and adversely affect its
   business, and so it enter into a futures contract for won.

a. Is this company speculating, hedging, both, or neither?

b. Would the company long or short the won?

B. Calculating Profi ts/Losses from Futures Trades

As in the examples of the text, assume that any broker’s fees or other transaction costs are minimal and can be ignored.

Also, as in the text, returns should be calculated as a percent of the initial margin.

5. Don took a long position for 8,000 bushels of December soybeans at 575 cents per bushel. He did not close his position
   prior to delivery. In December, the spot price was 593 cents per bushel.

a. Did Don make or lose money on this deal?

b. Calculate the amount of his profi t or loss.

c. Assume that the required initial margin was 5%. Calculate the initial margin.

d. Calculate Don’s return as a percent.

e. Calculate Don’s rate of return (as a simple interest rate), assuming that this position was open for 113 days.

6. Mike took a long position for 10,000 bushels of March wheat at 335 cents per bushel. He did not close the position
   prior to delivery. In March, the spot price was 307 cents per bushel.

a. Did Mike make or lose money on this deal?

b. Calculate the amount of his profi t or loss.

c. Assume that the required initial margin was 5%. Calculate the initial margin.

d. Calculate Mike’s return as a percent.

e. Calculate Mike’s rate of return (as a simple interest rate), assuming that this position was open for 74 days.

7. Veronica took a short position for 2,000 barrels of October crude oil at $78.35 per barrel. She did not close the position
   prior to the delivery date. In October, the spot price was $84.14 per barrel.

a. Did Veronica make or lose money on this deal?

b. Calculate the amount of her profi t or loss.

c. Assume the required initial margin was 5%. Calculate the initial margin.

d. Calculate Veronica’s return as a percent.

e. Calculate Veronica’s rate of return (as a simple interest rate), assuming that her position was open for 30 days.

Exercises 6.3 285