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The Intelligent Investor Benjamin Graham. The Intelligent Investor Rev Ed. Benjamin Graham. Rosa Shah Dec. Did u try to use external powers for studying? The contract would not be a success. Parties with short positions would hold their contracts until delivery and then deliver the cheapest form of the asset. This might well be viewed by the party with the long position as garbage! Once news of the quality problem became widely known no one would be prepared to buy the contract.
This shows that futures contracts are feasible only when there are rigorous standards within an industry for defining the quality of the asset. Many futures contracts have in practice failed because of the problem of defining. If both sides of the transaction are entering into a new contract, the open interest increases by one.
If both sides of the transaction are closing out existing positions, the open interest decreases by one. If one party is entering into a new contract while the other party is closing out an existing position, the open interest stays the same. Suppose that on October 24, , a company sells one April live-cattle futures contract.
It closes out its position on January 21, The futures price per pound is One contract is for the delivery of 40, pounds of cattle. What is the profit? How is it taxed if the company is a a hedger and b a speculator? Assume that the company has a December 31 year end.
What are the advantages to the financial system of requiring all standardized derivatives transactions to be cleared through CCPs? A CCP stands between the two parties in an OTC derivative transaction in much the same way that a clearing house does for exchange-traded contracts. In addition, CCP members are required to contribute to a default fund. The advantage to the financial system is that there is a lot more collateral i. There is also more transparency in that the trades of different financial institutions are more readily known.
The disadvantage is that CCPs are replacing banks as the too-big-to-fail entities in the financial system. There clearly needs to be careful oversight of the management of CCPs. Further Questions Problem 2. Trader B enters in a forward contract to do the same thing. The exchange dollars per euro declines sharply during the first two months and then increases for the third month. Ignoring daily settlement, what is the total profit of each trader?
When the impact of daily settlement is taken into account, which trader does better? The total profit of each trader in dollars is 0. Substantial losses are made during the first two months and profits are made during the final month. It is likely that Trader B has done better because Trader A had to finance its losses during the first two months.
Why does the open interest usually decline during the month preceding the delivery month? On a particular day, there were 2, trades in a particular futures contract. This means that there were 2, buyers going long and 2, sellers going short. Of the 2, buyers, 1, were closing out positions and were entering into new positions. Of the 2, sellers, 1, were closing out positions and were entering into new positions. Open interest is the number of contract outstanding. Many traders close out their positions just before the delivery month is reached.
This is why the open interest declines during the month preceding the delivery month. The open interest went down by We can see this in two ways. First, 1, shorts closed out and there were new shorts. Second, 1, longs closed out and there were new longs. Suppose that in September a company sells a March orange juice futures contract for cents per pound.
In December , the futures price is cents. In February , the futures price is cents. The company has a December year end. How is it realized? What is the accounting and tax treatment of the transaction is the company is classified as a a hedger and b a speculator? The price goes up during the time the company holds the contract from to cents per pound. A company enters into a short futures contract to sell 5, bushels of wheat for cents per bushel.
This will happen if the price of wheat futures rises by 20 cents from cents to cents per bushel. You could go long one June oil contract and short one December contract. Note that this profit is independent of the actual price of oil in June or December It will be slightly affected by the daily settlement procedures. What position is equivalent to a long forward contract to buy an asset at K on a certain date and a put option to sell it for K on that date?
The equivalent position is a long position in a call with strike price K. How much margin or collateral does the company have to provide in each of the following two situations? The banks do not have to post collateral. If the transactions are cleared bilaterally, the company has to provide collateral to Banks A, B, and C of in millions of dollars 0, 15, and 25, respectively.
What credit exposure does the bank have? The counterparty may stop posting collateral and some time will then elapse before the bank is able to close out the transactions.
You are required to download the. How high do they have to be for a 0. Assume daily price changes are normally distributed with mean zero.
Explain why the exchange might be interested in this calculation. Margin balances in excess of the initial margin are withdrawn. Calculate the number of margin calls and the number of times the investor has a negative margin balance and therefore an incentive to walk away. Assume that all margin calls are met in your calculations. Repeat the calculations for an investor who starts with a short position in the gold contract. The data for this problem in the 7th edition is different from that in the 6th edition.
For a 0.
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