1/26/16
Problem Set 1
Equilibrium in Futures Markets
Problem 1
£ 600,000
$1,000,000
$1=£0.60
NY
$1,200,000
LON
£1 = € 1.40
$1 = € 0.70
FRA
€ 840,000
Profit = $200,000
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1/26/16
Problem 2
£ 600,000
$1,200,000
$1=£0.50
NY
$1,000,000
LON
£1=CHF 1.50
$1=CHF 0.90
ZUR
CHF 900,000
Profit = $200,000
Basis too big, Problem 3
500,000 bu.
$1,050,000
Money $2.00 = 1 bushel
today
Storage $0.10
10%
$1,103,071.41 Money
30
later $2. = 1 bushel
$1,150,000
Profit = $46,928.59
Wheat
today
Wheat
later
500,000 bu.
Return is 18.45%
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1/26/16
Basis too small, Problem 4
500,000 bu.
$1,000,000
Money $2.00 = 1 bushel
today
Wheat
today
Storage $0.10
10%
$1,050,544.20 Money
03
later $2. = 1 bushel
Wheat
later
$1,015,000
500,000 bu.
Profit = $35,544.20
Borrow at 3.02%
Problem 13
$1,000,000
€770,000
FRA
today
$1 = € 0.77
3%
€781,475.99
FRA
later
€803,954.90
Profit = €22,478.90
NY
today
1%
$1 = € 0.80
NY
later
$1,004,943.62
What is not balanced?
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1/26/16
Problem 14: Gold
1000 oz.
$1,700,000
NY
today
$1.00 = £ 0.60
Spot £1020
Future £1050.60
1%
$1,708,404.15
NY
later
LON
today
$1.00 = £ 0.58
LON
later
$1,811,379.31
1000 oz.
Profit = $102,975.16
What is not balanced?
Problem 14: Silver
50,000 oz.
$1,700,000
NY
today
$1.00 = £ 0.60
Spot £20.40
Future £21.012
1%
$1,708,404.15
NY
later
LON
today
$1.00 = £ 0.58
$1,811,379.31
Profit = $102,975.16
LON
later
50,000 oz.
What is not balanced?
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1/26/16
Problem 14: Tin
155,000 lbs
$1,700,000
NY
today
$1.00 = £ 0.60
Spot £6.5806
Future £6.7781
1%
$1,708,404.15
NY
later
LON
today
$1.00 = £ 0.58
LON
later
$1,811,379.31
155,000 lbs
What is not balanced?
Profit = $102,975.16
Problem 15
$ 1,000,000
€770,000
FRA
today
$1 = €0.77
Spot 1324
Future 1363.72
Dividend 1.5%
R = 5%
€789,220.98
FRA
later
€836,000.00
Profit = €46,779.02
NY
today
$1 = €0.80
NY
later
$ 1,045,000
What is not balanced?
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1/26/16
Problem 16
$ 1,000,000
CHF 910,000
ZUR
today
$1 = CHF 0.91
Spot 1324
Future 1363.72
Dividend 1.5%
R = 3%
ZUR
later
CHF 923,562.53
NY
today
$1 = CHF 0.90
NY
later
CHF 940,500.00
$ 1,045,000
Profit = CHF 16,937.47
What is not balanced?
Problem 18
This is includes a Floating/Floating Swap
BW Homes
Net for RRNB: extra 1% each year
T + 2%
LIBOR + 1%
RRNB
LIBOR
CitiCorp
T-Bill + 1%
Counterparty
T-Bill
LIBOR + 1%
HSBC Bank
$10,000 per year profit!
6
1/26/16
Bonds as commodities (Problem 20)
$1,003,705.40
1.50%
$1,000,000
NY
today
NY
90 days
$1,003,804.40
1.52%
1.53%
NY
180 days
$1,007,573.58
Profit = $99.00
Bonds as commodities (Problem 21)
$1,017,408.41
7.00%
$1,000,000
NY
today
NY
90 days
7.50%
7.25%
NY
270 days
$1,055,739.13
Profit = $650.46
$1,055,088.67
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1/26/16
Bonds as commodities (Problem 22)
$1,035,630.37
7.10%
$1,000,000
NY
today
NY
180 days
$1,035,758.04
7.5%
7.25%
NY
270 days
$1,055,088.67
Profit = $127.67
Bonds as commodities (Problem 23)
$1,017,408.41
7.00%
$1,000,000
NY
today
$1,017,634.17
7.15%
7.12%
Profit = $225.76
NY
90 days
NY
180 days
$1,035,732.50
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1/26/16
Problem 24
•  Suppose the futures price of Plantonium (a
mineral which your firm uses heavily) is $55 per
unit for delivery in six months. At the same time
the spot price is $60. Assuming that the futures
market is reasonably efficient, which of the
following is the best choice?
a. The market expects a significant increase in available
supplies of plantonium between now and the delivery
date.
Problem 25
•  After the Chernobyl nuclear disaster in Russia, the
prices of agricultural commodities were quickly
bid much higher in active trading on the U.S. spot
and futures markets.
b. Automatically, without government intervention, this
put in place incentives to reduce consumption and
increase production of basic foodstuffs; in turn leading
to an increase in potential future supplies
c. This action was motivated by the desire for profits
d. Both b and c
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