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Lecture 13 PS

This document contains problems related to futures markets and asset pricing: 1) It asks why there is no futures market in cement. 2) It presents a scenario about the future price of coffee and asks about the risks to a hotel chain and coffee farmer, and whether a futures contract at a fixed price would benefit the parties. 3) It asks questions about margin requirements, investment returns, and percentage returns based on changes to the S&P 500 futures price in a given contract figure.

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Simon Galviz
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47 views

Lecture 13 PS

This document contains problems related to futures markets and asset pricing: 1) It asks why there is no futures market in cement. 2) It presents a scenario about the future price of coffee and asks about the risks to a hotel chain and coffee farmer, and whether a futures contract at a fixed price would benefit the parties. 3) It asks questions about margin requirements, investment returns, and percentage returns based on changes to the S&P 500 futures price in a given contract figure.

Uploaded by

Simon Galviz
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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LSE FM423 Asset Markets

Zachariadis

Problems for Lecture 13

1. Why is there no futures market in cement?

2. Suppose that in 3 months the cost of a pound of Colombian coffee will be either £1.25
or £2.25. The current price is £1.75 per pound.

(a) What are the risks faced by a hotel chain who is a large purchaser of coffee?
(b) What are the risks faced by a Colombian coffee farmer?
(c) Will each of the parties be made better off by entering into a futures contract
that fixes the price of coffee at £1.75? Why or why not?
(d) If the delivery price of coffee turns out to be £2.25, should the farmer have forgone
entering into a futures contract? Why or why not?

3. Turn to the S&P500 contract in Figure 22.1 of Bodie, Kane, and Marcus.

(a) If the margin requirement is 10% of the futures price times the multiplier of
$250, how much must you deposit with your broker to trade the March maturity
contract?
(b) If the March futures price were to increase to 1498, what percentage return would
you earn on your net investment if you entered the long side of the contract at
the price shown in the figure?
(c) If the March futures price falls by 1%, what is your percentage return?

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