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Problem-01a: Current crude oil price is $52.00 per barrel. You sell (short position) 5, five, crude...

Problem-01a: Current crude oil price is $52.00 per barrel. You sell (short position) 5, five, crude oil futures contracts at futures price of $54.00 per barrel with maturity of one month. (Size of the contract is 5) Note that the size of one futures contract is 1,000 barrels.

  1. What is your profit if the crude oil price is $57.00 at maturity and assume cash settlement for this problem?

ii. What is your profit if the crude oil price is $49.00 at maturity and assume      cash settlement for this problem?

Problem-01b: Using information in problem-01a:

  1. Graph your profit/loss function for likely crude oil prices between $20 and $80 in increments of $5.00 at maturity. Label both axes properly!
  2. Show the profit and loss for the likely prices in problem-01a, only two data points. Note that you already calculated them in 01a. Just add your findings to the graph as two data points.

Problem-02a: Current S&P Index is at 2,645. Suppose you take a long (buy) position on 6, six, S&P 500 futures contracts when the futures price of the index is 2700.00. Assume that maturity of the futures contracts is one-month. (Size of the contract is 6) Note that the size of one futures contract is equal to ($250)x(Index Value).

  1. What is your profit/loss if S&P 500 index is 2630.00 at maturity?

ii. What is your profit/loss if S&P 500 index is 2780.00 at maturity?

Problem-02b: Using information in problem 02a:

i.    Graph your profit/loss function for likely S&P 500 index numbers between    2500.00 and 2900.00 in increments of 20 at maturity. Label both axes properly!

ii.   Show the profit and loss for the likely prices in problem-02a. Note that you already calculated them in 02a. Just add your findings to the graph as two data points.

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Answer #1

In cash of Cash settlement, -

Profit/Loss of short future contract is = (Future Priceo - Assets Price on maturity)*No. of contract*contract size

Profit/Loss of Long Future contract = (Assets Price on maturity - Future Price0)*No. of Contract*contract size.

Please note, Assets or commodity price on maturity is almost equal to the Future Price on maturity.

01-a

Please refer to below spreadsheet for calculation and answer

N90 Short Position Future contract of Crude Oil 2- Crude oil Price today $52 $54 Short Future Price today Maturity No. of contract Size of contract 4 1 month 1,000 barrels Profit/Loss Crude Price on Maturity S57 $49 (15,000.00) 25,000.00 10 ii

Formula reference -

C9 Short Position Future contract of Crude Oil Crude oil Price today Short Future Price today Maturity No. of contract Size of contract 52 54 2 01-a 4 month 1000 barrels Crude Price on Maturit Profit/Loss 157 49 10 ii (SC$3-B10)*$C$5*$C$6

Thus,

i) Profit/Loss on Short Position of Future when crude oil Price on maturity $57 = - $ 15,000

ii) Profit/Loss on Short Position of Future when crude oil Price on maturity $49 = $ 25,000

01-b (i&ii)

Please refer to below spreadsheet for graphs of Crude Price on maturity and P/L of Short Future of Crude.

Plot of P/L short Furture position vs. Crude Price on maturity 12 01-b 13 i Crude Price on Maturi Profit/Loss $200,000.00 150,000.00 $100,000.00 50,000.00 S20 170,000.00 145,000.00 120,000.00 95,000.00 70,000.00 45,000.00 20,000.00 5,000.00 30,000.00 55,000.00 80,000.00 (105,000.00 130,000.00 15 $30 $35 17 18 19 20 21 $50 $10 S20 30 40 S50 $70 S80 $90 (50,000.00) S(100,000.00) (150,000.00) $70 $75 24 25 26 27 28 ii 29 30 Crude Price on Maturity Plot of P/L and Crude Price on maturity as in Problem 01-a Crude Price on Maturity| Profit/Loss 30,000.00 S25,000.00 S20,000.00 15,000.00 $10,000.00 $5,000.00 S57 $49 15,000.00 25,000.00 32 34 35 36 37 38 39 9 S50 $51 S52 $53 $54$55 $56 $57 $58 $(5,000.00) $(10,000.00) (15,000.00) $(20,000.00) Crude Price on maturity 41

Formula Reference-

12 01-b Plot of P/L short Furture position vs. Crude Price on maturity Crude Price on Maturity Profit/Loss 5200,000.00 $150,00000 $100,00000 $50,000.00 20 15 16 17 18 19 20 21 25 35 45 550 580 60 65 70 $150,000.00) $(100,000.00) 150,000.00) Crude Price on Maturity 28 ii 29 30 Plot of P/L and Crude Price on maturity as in Problem 01-a Crude Price on Maturity $30,000.00 $25,000.00 20,000.00 15,000.00 10,000.00 $5,000.00 Profit/Loss 57 49 35 36 SI5,000.00) (10,000.00) (15,000.00) (20,000.00) 38 39 Crude Price on maturity

02-a(i&ii)

Please refer to below spreadsheet for calculations and answers.

45 02-a 46 47 48 49 50 51 52 53 Long Position Future Contract of S&P 500 index $2,645 $2,700 Current S&P index Future Price of Index Maturiy No. of Contract Size of Contract 1 Month $250 Index on Maturit Profit/Loss $2,630 $2,780 55 ii $120,000

Formula reference-

C54 45 |02-а 46 47 48 Long Position Future Contract of S&P 500 index Current S&P index Future Price of Index Maturiy No. of Contract Size of Contract 2645 2700 Month 50 51 52 53 54 55 ii 56 250 Index on Maturity Profit/Loss 2630 2780 1=(B54-$C$48)*SCS50*$C$51 =(B55-$C$48)*SCS50*SCS51

Thus,

i) Profit/Loss on Long Future on S&P 500 when on maturity S&P 500 at $2,630 = - $ 105,000

ii) Profit/Loss on Long Future on S&P 500 when on maturity S&P 500 at $2,780 = $ 120,000

02-b(i&ii)

Please refer to below spreadsheet for Graph of Profit/loss on Long Future position and S&P 500 at maturity

Chart 4Xf 57 02-b 58 i Index on Mat Profit/Loss S&P 500 index Future of S&P $2,500 $2,520 $2,540 $2,560 $2,580 $2,600 52,620 $2,640 $2,660 $2,680 $2,700 52,720 $2,740 ($300,000) $400,000 61 ($240,000 ($210,000 ($180,000 ($150,000 ($120,000 ($90,000) ($60,000) ($30,000) $300,000 $200,000 65 $100,000 $2,500 $2,550 $2,600 700 $2,750 $2,800 $2,850 $2,900 $2,950 530,000 $60,000 $90,000 $120,000 $150,000 $180,000 5210,000 $240,000 $270,000 $300,000 ($100,000) 72 52,780 $2,800 $2,820 $2,840 52,860 $2,880 $2,900 ($200,000) 74 75 76 ($300, 000) ($400, 000) 78 S&P Index on maturity 81 ii Plot of index on Maturity and Profit/Loss on Long Future as per problem-02-a Index on MaturityProfit/Loss Chart Title S120,000 $150,000 85 $100,000 $2,640 $2,660 $2,700 $2,720 2,740$2,760 $2,780 $2,800 ($50,00 (S100,000) ($150,000) 92 93 S&P 500 index on maturity

Formula reference -

5 02-b 7 58 i Index on Profit/Loss t of S&P 500 index 2520 2540 2560 2580 2600 2620 2640 2660 2680 2700 2720 2740 2760 2780 2800 2820 2840 2860 2880 2900 B59-SCS48) SCS50 SCS51 (B60-SCS48) SC$50 SC$51 B61-SC$48) SC$50 SC$51 (B62-SC$48) SCS50 SC$51 (B63-SC$48) SC$50 SC$51 (B64-SCS48) SCS50 $C$51 (B65-SC$48) SC$50 SC$51 -(B66-SCS48) SCS50 SCS51 (B67-SCS48) SC$50 SC$51 B68-SC$48) SC$50 $C$51 (B69-SC$48) SCS50 SC$51 (B70-SC$48) SCS50 SC$51 (B71-SCS48) SC$50 $C$51 (B72-SC$48) SC$50 SC$51 -(B73-SCS48) SCS50 SCS51 (B74-SCS48) SC$50 SC$51 B75-SC$48) SC$50 SC$51 (B76-SCS48) SC$50 $C$51 (B77-SCS48) SCS50 SC$51 (B78-SC$48) SCS50 SC$51 (B79-SCS48) SCS50 SC$51 61 $100,000 2,500 $2,5so S2,600 2,650 2,70o S2,750 S2,800 S2,850 S2,900 S2,9s0 71 ($100,000) 72 ($200,000) 74 75 76 (5300,000) ($400,000) 78 S&P Index on maturity 81 ii Plot of Index on y and Profit/Loss on L Future as per oblem-02-a Index on Maturi Profit/Loss Chart Title 2630 2780 -(B83-$CS48) SC$50 $C$51 (B84-SCS48) SCS50 SC$51 $150 000 85 $100,000 S2,620 $2,640 $2,660 $2,700 $2,720 $2,740 $2,760 $2,780 $2,800 ($50,000 ($100,0 $15q,000) 91 93 S&P 500 index on maturity

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