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Midterm Examination
Financial Derivatives (FIN3201)
Time: 1 hour and 25 minutes, Marks: 40

Question 1 (2 +2= 4)
A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15,000 pounds. The
current futures price is 160 cents per pound, the initial margin is \$6,000 per contract, and the maintenance margin is \$4,500
per contract.

i. What price change would lead to a margin call?

ii. Under what circumstances could \$2,000 be withdrawn from the margin account?

Question 2 (2+ 2 +2 =6)

Write the valuation models for the following types of futures contracts:

iii. A futures on an asset that provides a known dividend yield.

Question 3 (2+3+2+3 =10)
Consider a futures contract on a T. Bond with:
Maturity = six months;
Spot price = S = \$66,000;
Futures price = F = \$68,000;
Current 6-month T.Bill Rate = r = 6%; and the yield curve is flat.

A. Suppose that total transactions costs = \$200, for a complete arbitrage with one contract. A. If no coupon is paid on this
bond during the next six months:

ii. Discuss specific arbitrage opportunities.

B. Now suppose a coupon is paid on this bond in 6 months, just prior to expiration of the forward contract. The present
value of this coupon payment is \$900.

i. What is the theoretical futures price?

ii. Discuss specific arbitrage opportunities and calculate the arbitrage profit.
Question 4 (5+5 =10)
A stock is expected to pay a dividend of \$1 per share in two months and in five months. The stock price is \$50, and the
risk-free rate of interest is 8% per annum with continuous compounding for all maturities. An investor has just taken a
short position in a six-month forward contract on the stock.
i. What are the forward price and the initial value of the forward contract?

ii. Three months later, the price of the stock is \$48 and the risk-free rate of interest is still 8% per annum. What
are the forward price and the value of the short position in the forward contract?

Question 5 (3+3+4 = 10)

A stock price is \$29. An investor buys one call option contract on the stock with a strike price of \$30 and sells a call option
contract on the stock with a strike price of \$32.50. The market prices of the options are \$2.75 and \$1.50, respectively. The
options have the same maturity date.

i. Draw and describe the investor's payoff and profit line for long (buying) call option.
ii. Draw and describe the investor's payoff and profit line for short (selling) a call option.

iii. Draw and describe the investor's payoff and profit line for the portfolio of long and short call option.

Question 6 (Bonus: 2 marks)

Explain what a stop-limit order to sell at 20.30 with a limit of 20.10 means.