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Question 1 (10 Marks)
The West Texas Intermediate (WTI) Light Sweet Crude Oil futures contract, as one of the world’s most liquid energy futures
contract, provides market participants with direct exposure to the crude oil market.
On 15 February 2006 a speculator who expects the crude oil price to fall over the short term sells ten June 2006 WTI futures
contracts at a price of USD $62.17 per barrel. The speculator closes out the futures position on 1 March 2006 at a price of USD
$66.36 per barrel. Each contract is written on 1,000 barrels of crude oil (“contract size”). The initial and maintenance margins are
USD $5.00 and USD $3.00 per barrel, respectively.
The daily settlement prices for the June 2006 WTI futures contract during the holding period are shown in the table below. Note
futures contracts are traded only on business days.
Required:
(a) At the time the futures position is established on 15 February 2006, what is the minimum price movement on a per barrel basis
that would generate a margin call? Report your answer in 2 decimal places (dps). (2 marks)
(b) Construct a table as below to illustrate the daily marking-to-market (and final settlement) of the speculator’s overall futures
position for the ten contracts. Assume no withdrawals of any money deposited to the “Initial and Margin account balance”. If
there is a shortfall in the “Initial and Margin account balance” at the end of any trading day, the speculator will receive the
margin call soon afterwards (i.e., within the same day), and is able to top up the margin account balance back to initial margin
level by the start of the next trading day as instructed. (6 marks)
Question 3 (10 Marks)
Rebecca Smith, an analyst in the investment management division of a financial services firm, is developing earnings forecast for a
small local dairy company in New Zealand (NZ). The company’s revenues are closely linked to the price of global dairy
commodity products, which are set by the global market and priced in US dollars (USD). All expenses of the company are incurred
in the local market and denominated in NZ dollars (NZD).
The strength of the NZ economy depends significantly on sales of dairy commodity products denominated in USD. As a result,
movements in world dairy commodity products in USD terms and the value of the NZD are strongly positively correlated. That is
an increase in the USD price of dairy commodities is strongly correlated with an increase in the value of the NZD against the USD.
An increase in commodity prices would increase the company’s sales in USD terms, all else being equal. On the other hand, the
appreciation of the NZD relative to the USD would reduce the company’s sales in terms of the home currency (NZD).