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BUS 316 (1)
Jing Li (1)


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Business Administration
BUS 316
Jing Li

BUS 316 Derivative Security Homework #1 (Due in class May 27, 2013) Question 1. What is a derivative security? What are some examples of derivatives? Question 2. What is a future? What is a forward? Compare the similarity and difference between a future and a forward. Question 3. Describe what are hedging, speculation, and arbitrage. Question 4. Go to CME Group website to find out the contract specification of corn futures. Start from the link: http://www.cmegroup.com/trading/agricultural/ ; then go to “Corn Futures”, then “Contract Specifications”. Find out the following items: 1) contract size; 2) deliverable grade of underlying asset; 3) unit of price quoted; 4) available delivery month. Question 5. Today is October 1. You signed a deal with a customer to sell her 2000 pounds of cattle on December 1 for the spot price then. You decide to use 2-month delivery cattle futures contracts to hedge the price fluctuation of cattle. Each futures contract underlying 1000 pounds of cattle. Suppose the futures price is $91.20 cents/pound. On December 1, the cattle spot price turns out to be $88.30 cents. a) How do you hedge with the cattle futures? Specify long futures or short futures, and how many contracts to use. b) What is your profit/loss from your futures position? What is your income realized from selling the cattle with the hedge? c) Now we consider margin requirement of the futures contract. Suppose the initial margin required is $200 per contract. And t
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