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RM solutionChapter 5: Solutions to Problems 1. Suppose you buy a futures contract on BSE 30 Sensex futures at 16,500 on March 10. The initial margin is INR 8,500 and the maintenance margin is INR 5,000. At what futures price would you receive a margin call?

Solution: Initial Margin = 8500
Maintenance Margin = 5000
Futures price = 16,500
Value per contract = 165,000
Margin call will be activated when the maintenance margin goes below 5,000, or the loss from futures exceeds 3,500. Since you bought Sensex futures, loss will arise if Sensex falls, and a loss of 3,500 will have to be made in order for a margin call to occur. Thus, margin call will be activated when the value of futures falls below 161,500, or Sensex falls below 16,150. 2. On January 2, when the futures contract on Jet Airways stock started trading for expiry on March 31, Kishore sold 10 contracts to Raghav, Raja sold 15 contracts to Jeeva, and Rama sold 20 contracts to Bose. On January 3, Jeeva bought 5 contracts from Raghav and Bose sold 10 contracts to Asjeet. Calculate the open interest in this contract on January 2 and January 3.

Solution: Jan 2:
Kishore sold 10 contracts
Raghav bought 10 contracts
Raja sold 15 contracts
Jeeva bought 15 contracts
Rama sold 20 contracts
Bose bought 20 contracts
Open interest: total sold contracts = 45 = total bought contracts.
Jan 3:
Jeeva buys 5 contracts
Raghav sold 5 contracts
Bose sold 10 contracts
Asjeet sold 10 contracts

Net position: Bought | Sold | Raghav 5 | Kishore 10 | Jeeva 20 | Raja 15 | Bose 10 | Rama 20 | Asjeet 10 | | Total: 45 | Total: 45 |

Open interest: 45 3. Assume that you enter into a long position in a January gold futures (100 grams) contract at INR 10,079 on October 15, 2007. On January 16, 2008, you decide to close your position when the futures price is INR11,269. One contract is

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