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(2024) Fina202 Tutorial 4 Questions

The document is a tutorial for Finance 202 at the University of KwaZulu-Natal, focusing on risk management and derivatives. It includes questions on futures contracts, margin accounts, options, and currency exchange calculations. The tutorial aims to enhance understanding of financial concepts through practical application and problem-solving.

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7 views3 pages

(2024) Fina202 Tutorial 4 Questions

The document is a tutorial for Finance 202 at the University of KwaZulu-Natal, focusing on risk management and derivatives. It includes questions on futures contracts, margin accounts, options, and currency exchange calculations. The tutorial aims to enhance understanding of financial concepts through practical application and problem-solving.

Uploaded by

Pro studying
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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UNIVERSITY OF KWAZULU-NATAL

SCHOOL OF ACCOUNTING, ECONOMICS AND FINANCE


FINANCE 202
Topic 4: Risk Management and Derivatives
International Financial Management
Tutorial 4 Questions

Question 1
Are you clear on the difference between these three questions?
a) What does it mean to go long on a futures?
b) What does it meant to go short on a futures?
c) What does it mean to go long on a call option?
d) What does it mean to go long on a put option?

Question 2
Use the following information to calculate the balance at end of day 2 on your Margin
Account, assuming that you have taken a Short position on a futures contract.
 The initial margin is R30.
 The initial Futures price is R112.
 On Day 1 the price changed to R114.
 On Day 2 the price changed to R108.
Refer to the table below and provide the correct monetary values for the margin account
value from (a) to (c) below. Take care to show the signs (negative), where applicable, of your
cash flows.

. SHORT
DAY 0 (a)
DAY 1 (b)
DAY 2 (c)

Question 3
The futures price on Brent Crude is R100. The initial margin requirement is R5 and the
maintenance margin is R2.50.
* All values provided are on a per contract basis.
a) If you buy (go long) on ten contracts, where each contract represents 100 ounces, how
much will you have to deposit? What needs to happen for you margin account to
increase?
b) What happens if the price on day one drops to R97? What happens to your margin
account balance if you are long on the futures?
c) What happens if on day 2 the price decreases further to R92? What happens to your
margin account? Assume again that you are long of the contract.
d) Discuss what it means for a futures contract to be marked-to-market.
Question 4
In October 2024, a breakfast cereal manufacturer enters a contract to supply cereal to Spar
Supermarket. The company needs 75 000 bushels of corn in March to meet its supply needs.
The cereal maker calculated that he must purchase corn at R10.00/bushel or less in order to
breakeven. Maize March futures are trading at R7.00 a bushel. The cereal manufacturer
wants to lock in this price as it is less than his R10/bushel limit.
a) Will this manufacturer go LONG or SHORT on corn futures?
b) How many contracts will he need if each contract covers 5000 bushels?
c) If the spot price in March 2025 is R10, explain this manufacturer’s spot and futures
market outcomes. What has the manufacturer ended up paying per bushel?

Question 5
You have purchased a call option which has a strike price of R50.
a) Does this option have value if the price at maturity is R30?
b) Does this option have value if the price at maturity is R70?
c) Does this option have value if the price at maturity is R50?
d) Does this option have value if the price at maturity is R70 and you paid R5 for this
option?
e) What is the minimum price at maturity needed in order for you to break-even if you did
pay R5 for this call option?
Question 6
You have purchased a put option which has a strike price of R70.
a) Does this option have value if the price at maturity is R50?
b) Does this option have value if the price at maturity is R90?
c) Does this option have value if the price at maturity is R70?
d) Does this option have value if the price at maturity is R50 and you paid R5.00 for this
option?
e) What is the highest price at maturity which would still allow for you to break-even if you
did pay R5.00 for this put option?

Question 7
A German company is about to enter 2 transactions, paying an amount of GBP 4 000 000 to a
UK company, and receiving an amount of USD 3 000 000 from a USA company. Current
exchange rates are €1=£0.8 and $1 = €0.6. Calculate what the company will receive and pay
in Euros. Explain if these are direct or indirect quotes.

Question 8
The current exchange rate is £1 = $1.5150 - $1.5200.
Calculate the rate at which:
a) A US bank would sell a US customer £.
b) A UK bank would buy $ from a UK customer.
Hint – note the BASE / TERM currency.
Question 9
Calculate how much of their own currency exporters would receive or how much their own
currency importers would pay, in each of the following situations, if they were to exchange
their own currency with another currency at the spot rate.
a) A UK exporter receives a payment from a Danish customer of 150 000 Kroner.
b) A German importer buys goods from a Japanese supplier and pays 1 million Yen.

Spot rates are as follows:


Bank sells Bank buys
Denmark Kr per £1 9.4340 9.5380
Japan ¥ per €1 203.65 205.78

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