Derivatives - Derivatives Section 1
21. While dealing with futures contracts, the maintenance margin requirement most likely refers to:
- Option : C
- Explanation : Futures position holders are required to maintain a minimum level of account balance which is called the maintenance margin requirement. The amount sufficient to bring ending account balance back to initial margin requirement is called the variation margin. Initial margin is the collateral or performance bond that ensures the fulfillment of the obligation.
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22. In which of the following contracts would the buyer face the least default risk?
- Option : A
- Explanation : While forward contracts and over-the-counter options are customized private contracts between parties with a presence of default risk, futures contracts have the least risk of default because of the presence of a clearinghouse as an intermediary guaranteeing the parties against default through the practice of daily settlement.
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- Option : A
- Explanation : A swap is an agreement between two parties to exchange a series of future cash flows. Microsoft receives floating interest rate payments and makes fixed interest rate payments. The given agreement is a swap.
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- Option : A
- Explanation : Because the future has a daily price limit of €10, the highest possible settlement price on Day 2 is €115. Therefore, the marked to market value would be (€115 - €105) * 50 = €500.
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- Option : B
- Explanation : Profit = max (0, premium – value of put at expiration) = max (0, premium- (X-S)) = 2.5 – 1 = 1.5.
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