Question

A company takes a short position in 10 futures contracts on soybean on October 2, 2020. The initial futures price is $10.175 per bushel. Suppose on December 31, 2020 the futures price is $10.02 per bushel. On March 20, 2021 it is $9.89 per bushel. The contracts are closed out on March 20, 2021. What gain is recognized (taxable) in the accounting year January 1 to December 31, 2021 if the company is classified as a hedger? Each contract is on 5,000 bushels of soybean.

	A.	$7,750
	B.	$6,500
	C.	$14,250
	D.	$50,875

A company takes a long position in 5 futures contracts on soybean on October 2, 2020. The initial futures price is $10.19 per bushel. Suppose on December 31, 2020 the futures price is $10.25 per bushel. On March 20, 2021 it is $10.42 per bushel. The contracts are closed out on March 20, 2021. What gain is recognized (taxable) in the accounting year January 1 to December 31, 2021 if the company is classified as a speculator? Each contract is on 5,000 bushels of soybean.

	A.	$5,750
	B.	$4,250
	C.	$1,500
	D.	$50,950

Luby’s Inc. has derivatives transactions with four different counterparties A, B, C, D which are worth $8 million, -$17 million, $20 million and -$32 million, respectively to Lucy’s. The transactions are cleared centrally through the same CCP and the CCP requires a total initial margin of $10 million. How much margin or collateral does Luby’s have to provide?

	A.	49 million
	B.	21 million
	C.	31 million
	D.	38 million

Suppose a trader who owns 320,000 pounds of commodity A decides to hedge the value of her position with the futures contracts. One futures contract is for the delivery of 40,000 pounds of commodity B. The price of commodity A is $21.20 and the futures price is 18.30 (both dollars per pound). The correlation between the futures price and the price of commodity A is 0.92. The volatilities of commodity A and the futures are 0.31 and 0.38 per year, respectively. What is the minimum variance hedge ratio?

	A.	0.82
	B.	1.23
	C.	1.13
	D.	0.75

Suppose a trader who owns 320,000 pounds of commodity A decides to hedge the value of her position with the futures contracts. One futures contract is for the delivery of 40,000 pounds of commodity B. The price of commodity A is $21.20 and the futures price is 18.30 (both dollars per pound). The correlation between the futures price and the price of commodity A is 0.92. The volatilities of commodity A and the futures are 0.31 and 0.38 per year, respectively. Should the trader take a long or short futures position?

	A.	Long
	B.	Short

Answer 1

Part 1:

Taken short position, No. of contracts = 10

Contract size = 5,000 bushels

Initial future price = 10.175

Price on 31st Dec =10.02

Gain on contract

= (10.175 - 10.02)×5,000×10 = $7,750

Answer is option A

part 2:

Taken long position, No. of contracts = 5

Contract size = 5,000 bushels

Initial futures price = 10.19

Price on 31st Dec. = 10.25

Gain on contract

= (10.25 - 10.19)×5×5,000 = $1500

Answer is option C

Part 3:

Derivatives values with A = 8 million

Derivatives values with B = -17 million

Derivatives value with C. = 20 million

Derivatives value with D. = -32 million

Initial Margin. = 10 million

Total margin required. = 31 million

Answer is option C

Part 4:

Minimum variance hedge ratio = ρ×σy÷σx

= 0.92×0.31÷0.38 = 0.75

Answer is option D

Part 5:

A trader owns 3,20,000 pounds of commodity A

So trader will be afraid of price of commodity A going down, so trader will take short position

Answer is option B