Solutions Manual for Options, Futures, and Other Derivatives, 11th Global Edition by Hull

CHAPTER 2 Futures Markets and Central Counterparties Practice Questions 2.1 There will be a margin call when $1,000 has been lost from the margin account. This will occur when the price of silver increases by 1,000/5,000 $0.20. The price of silver must therefore rise to $17.40 per ounce for there to be a margin call. If the margin call is not met, your broker closes out your position. 2.2 The total profit is ($50.50 $48.30) 1,000 $2,200. Of this ($49.10 $48.30) 1,000 or $800 is realized on a day-by-day basis between September 2021 and December 31, 2021. A further ($50.50 $49.10) 1,000 or $1,400 is realized on a day-by-day basis between January 1, 2022, and March 2022. A hedger would be taxed on the whole profit of $2,200 in 2022. A speculator would be taxed on $800 in 2021 and $1,400 in 2022. 2.3 A stop order to sell at $2 is an order to sell at the best available price once a price of $2 or less is reached. It could be used to limit the losses from an existing long position. A limit order to sell at $2 is an order to sell at a price of $2 or more. It could be used to instruct a broker that a short position should be taken, providing it can be done at a price at least as favorable as $2. 2.4 In futures markets, prices are quoted as the number of U.S. dollars per unit of foreign currency. Spot and forward rates are quoted in this way for the British pound, euro, Australian dollar, and New Zealand dollar. For other major currencies, spot and forward rates are quoted as the number of units of foreign currency per U.S. dollar. 2.5 These options make the contract less attractive to the party with the long position and more attractive to the party with the short position. They therefore tend to reduce the futures price. 2.6 Margin is money deposited by a trader with his or her broker. It acts as a guarantee that the trader can cover any losses on the futures contract. The balance in the margin account is adjusted daily to reflect gains and losses on the futures contract. If losses lead to the balance in the margin account falling below a certain level, the trader is required to deposit a further margin. This