Role of a clearing house in a futures market

EIFM Seminar 11 – week commencing Jan 10th 2022

Question 1: Suppose trader X bought one December gold futures contracts on COMEX division of the New York Mercantile Exchange on June 5. The gold futures price is $600 per ounce on that day. The contract size is 100 ounces. The initial margin is $2,000 per contract. The maintenance margin is $1,500 per contract. Suppose the settlement price of Dec gold futures from June 5th to June 7th is shown in the table. Trader X closes out the position on June 7th at $597. Between the opening and closing day, he keeps the position by meeting margin calls. Compute the daily gain (loss), cumulative gain (loss), margin account balance of and variation margin of trader X each day. Calculate his total return.

Question 2: Explain the role of a clearing house in a futures market.

Question 3: Given the information in the table below answer the following two question

Intel Option Prices (Sept 12, 2016; Stock Price=19.56); Source: CBOE
Strike Price Oct Call Jan Call Apr Call Oct Put Jan Put Apr Put
17.50 2.300 2.775 3.150 0.125 0.475 0.725
20.00 0.575 1.175 1.650 0.875 1.375 1.700
22.50 0.075 0.375 0.725 2.950 3.100 3.300

(a) What will be the proceeds and net profit to an investor who purchases the April expiration Intel calls with exercise price $20 if the stock price at maturity is $23? What if the stock price at maturity is $17?

(b) Answer part (a) for an investor who purchases an April expiration Intel put option with exercise price $22.5

4. Explain the statement made by the Chairman of CBoT in the following extract:

‘The Chicago Board of Trade will launch an oats futures options contract on May 1. Options on oats will provide a variety of hedging possibilities. The American Oats Association in Minneapolis said that producers were more likely to use options than futures. According to the CBoT chairman, by purchasing options, a hedger can establish price ceilings and floors, and still benefit if cash prices change in his favour’.