Question

B. Bill Jarvis, a fund manager, wishes to rebalance his portfolio of stocks by selling his current holding of 3,000 Intel stocks in 5 days-time. Today, February 12, the March Intel stock futures contracts trade at $21 per share. On this day (February 12) Bill Jarvis takes a hedging position in March Intel futures contracts. The initial margin is $450 per contract and the maintenance margin is $300 per contract. The size of a futures contract is 100 Intel stocks. Assume that Bill Jarvis withdraws any daily excess obtained in the futures trade. Assume the following evolution of Intel stock futures prices for the next 5 days: Date Daily Gains/Losses Margin Balance Margin Call/Cash Withdrawals Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Settlement Price $21 $20.5 $22 $22.6 $22.9 $20.6 a) Fill the table above and calculate Bill Jarvis's cumulative gain/loss at the end of February, 17th, 5 marks b) Assume that, on February 17, Intel stocks are trading at a market price of $18. Based on this information, calculate: I. The basis value of Intel stocks on February, 17th 0.5 marks II. The effective value received by Bill Jarvis from the sale of the fund's holding on Intel stocks 0.5 marks

Answer 1

PT a

	Price	Daily gain/Loss	Total Gain /loss on 3000 Contract	Margin balance	Margin Call	Cash withdrawl
Feb-12	21			13500
Feb-13	20.5	0.5	1500	15000		1500
Feb-14	22	-1.5	-4500	9000	4500
Feb-15	22.6	-0.6	-1800	11700	1800
Feb-16	22.9	-0.3	-900	12600	900
Feb-17	20.6	2.3	6900	20400		20400
Cumulative gain or loss			1200

PT b Basis Value = Spot price - Future price

=18-20.6 i.e. -2.60

Sales proceed from sale of stock = 3000 shares *$18 i.e.$54000

Profit in future contract = 1200

Effective value =$54000+$1200 i.e.$55200