DEF PLC, an oil extraction company, wants to hedge its exposure to crude oil prices. Therefore, on 17th June 2020 it neg

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DEF PLC, an oil extraction company, wants to hedge its exposure
to crude oil prices. Therefore, on 17th June 2020 it
negotiates a short futures contract for 50,000 barrels of Brent
crude deliverable December 2020. The exchange’s initial margin
requirement is $100,000 and the margin call threshold is $40,000.
The dynamics of the Brent futures prices shortly after the contract
has been negotiated are the following:
Date
Futures price, $ per barrel
17/06/2020
25.45
18/06/2020
25.41
19/06/2020
24.14
22/06/2020
26.62
23/06/2020
29.87
24/06/2020
31.12
25/06/2020
30.89
26/06/2020
32.34
29/06/2020
31.99
30/06/2020
31.68
01/07/2020
31.61
Question 6: Identify the total payoff of the
futures contract at 1st July 2020
a) $308,000
b) -$308,000
c) $3,500
d) -$3,500
e) $36,500
Question 7: Identify the number of margin calls
triggered by 1st July 2020
a) 0
b) 1
c) 2
d) 3
e) 4
Question 8: Calculate the total margin payments
payable to the exchange up to 1st July 2020
a) $444,500
b) $344,500
c) $100,000
d) $65,500
e) $165,500
On 1st July 2019 the spot price is $30.17 per bushel,
the annual risk-free interest rate is 1.30% per annum and the
present value of rental payments for the warehouse sufficient to
store 50,000 barrels of oil over a 6-month period is $100,000.
Question 9: Calculate the value, if any, of the
riskless profit that DEF can obtain from arbitraging on the futures
market, assuming that all rent is payable at the beginning of the
storage period and interest on loans and deposits is charged
semi-annually.
a) $18,226
b) $28,000
c) $37,774
d) $182,240
e) No riskless profit can be obtained from arbitrage
Question 10: Calculate the present value of
rental payments at which DEF would be indifferent towards
arbitrage, assuming no trading costs
a) $62,226
b) $72,000
c) $81,774
d) $137,774
e) Arbitraging is not beneficial to DEF regardless of the
present value of rental payments