BUS 316 Derivative Security
(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