Consider the following information:

r_US  = 4% ; r_UK = 7%

E₀ = $2.00 per pound;

F₀ = $1.98 per pound (1-year delivery), where the interest rates are annual yields on US or UK bills.

Would you long or short UK pounds? 

You manage a $19.5M portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into T-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decided to temporarily hedge your equity holdings with an S&P 500 index futures contract. 

What should you do?

You manage a $19.5M portfolio, currently all invested in equities, and believe that the market is on the verge of a big but short-lived downturn. You would move your portfolio temporarily into t-bills, but you do not want to incur the transaction costs of liquidating and reestablishing your equity position. Instead, you decided to temporarily hedge your equity holdings with an S&P 500 index futures contract. 

Given that S&P index is now 1950 and the contract multiplier is $50, if your equity holdings are invested in a market index fund, how many contracts should you enter?

Farmer Brown grows red corn and would like to hedge the value of the coming harvest.  If he grows 100,000 brussels, and each futures contract calls for delivery of 5,000 brussels, how many contracts should Farmer Brown buy or sell to hedge his position? 

An oil distributor plans to sell 10,000 barrels of oil in June. 

The size of one contract is 100 barrels.

Original futures price = F₀ = $52

Given that the spot price = $51, what are the total proceeds? 

Assuming no arbitrage opportunity, futures price will converge towards the spot price at maturity. 

Assume you bought 100 shares of ABC share at $50 per share with an initial margin requirement of 50% and maintenance margin of 30%. 

Suppose the stock has fallen to $30. Is there a margin call? If so, how much? 

If you are going to buy an apartment in Singapore next year, are you long or short Singapore Real Estate now? Would you long or short futures?

FMI used to be called FIIM. What do you think it stands for? 🤔