HW1. Due back on Thursday, December 5. From the text book: Q: 1.28,

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 ---