A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset

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A Derivative Is A Contract Between Two Or More Parties Whose Value Is Based On An Agreed Upon Underlying Financial Asset 1 (79.43 KiB) Viewed 39 times

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common underlying instruments include bonds, commodities, currencies, interest rates, market indexes, and stocks. a) "Speculation in futures markets is pure gambling. It is not in the public interest to allow speculators to trade on a futures exchange." Discuss this viewpoint. [5 Marks] b) Suppose that you enter into a six month forward contract on a non-dividend-paying stock when the stock price is K800 and the risk-free interest rate (with continuous compounding) is 12% per annum. What is the forward price? [3 Marks] c) A trader enters into a short forward contract on 100 million yen. The forward exchange rate is $0.0074 per yen. How much does the trader gain or lose if the exchange rate at the end of the contract is; 1. $0.0074 per yen? [3 Marks] [3 Marks] II. $0.0091 per yen? d) Suppose that you enter into a short futures contract to sell July silver K17.2 per ounce. The size of the contract is 5000 ounces. The initial margin is K4000, and the maintenance margin is K3000. I. What change in the futures price will be to a margin call? What happens if you do not meet the margin call? [5 Marks] [3 Marks] II. e) A trader writes a December put option with a strike price of K40. The price of the option is K5. Under what circumstances does the trader make a gain? [3 Marks] [Total 25 Marks]