Question

7. Case 2: Iternational Finance and Derivatives

Based on the information below, answer questions 7 to 11.

As part of your new job as FOREX broker, one of your clients ask you to take long position in the CME CHF/U.S. Dollar contract. It is written on CHF 125,000 and quoted in $ per CHF. The strike price is $1.1800 the maturity is 3 months. At initiation of the contract, the long posts an initial performance bond of $5,900. The maintenance performance bond is $4,000. Your client will cancel his position after 5 days. Assume that the price of the future during the following five days is:

Day	Strike Price (close price, settlement price) (USD/CHF)
1	$1.1850
2	$1.1950
3	$1.1750
4	$1.1550
5	$1.1600

What is the value in US dollars of your client’s contract?

a. $125,000

b. $147,500

c. $105,932

d. $141,600

Answer: _____

8. What is the balance in your client’s account for day 2?

a. $5,900

b. $4,000

c. $7,775

d. $1,875

Answer: _____

9. How many margin calls you will make to this client during the 5 days received?

a. 0

b. 1

c. 2

d. 3

Answer: _____

10. What is the net gain (or loss) for this client?

a. $3,400

b. -$3,400

c. $2,500

d. -$2,500

Answer: _____

11. If this client decide, to use options instead future contracts to speculate over the apreaciation of the swiis franc (CHF), what could be the best strategy to follow?

a. Buy a call over the CHF

b. Sell a call over the CHF

c. Buy a put over the CHF

d. Sell a put over the CHF

Answer: _____

Answer 1

7. The client has taken a long position in the CME CHF/U.S. Dollar contract. The question states that it is written on CHF for CHF125,000 and quoted in $ per CHF. The strike price when entering the contract is $1.1800. Hence, the Dollar Value of the contract = CHF 125,000 x $1.1800 = $147,500.

8.On day 1, 1 CHF = $1.1850. This is positive as it raises the Dollar Value of the contract (125,000 CHF will be worth more Dollars). Hence, there is no impact to the Margin balance. Hence, the balance available for Day to will be $5,900.

Similarly, on Day 2, 1 CHF = $1.1950. Hence, at the end of Day 2 also there will be no impact to margin balance.  

Hence, the correct answer is a) $5,900.

9. During the 5 days,

Day	Strike Price	Change	Impact	Margin Balance	Margin Call
1	1.1850	0.0050	0	5900	0
2	1.1950	0.0100	0	5900	0
3	1.1750	-0.0200	-2500	3400	0
4	1.1550	-0.0200	-2500	900	0
5	1.1600	0.0050	625	900	0

Hence, we make one margin call. The correct answer is a) 0.

10. To cancel the contract after 5 days, the client will have to square off his position. Since he earlier took a long position (buy), he will now have to take a short position (sell) for the same contract size.  

Net gain / (loss):

(Selling Rate - Buying Rate) x Size of Lot = (1.1600 - 1.1800) x 125,000 = -$2,500

There is a loss of $25,00. The correct answer is d)

11. THe client wants to speculate over the apreaciation of the swiis franc (CHF). This implies that he bellives that 1 CHF can buy more $ or 1 CHF > $1.1800. In this case, he should buy a call over the CHF.This means that he can buy CHF at a predetermined price. SInce he i bullish the market value of the CHF will rise above this price and he will be able to make a profit if his view is validated by the market.  

The correct answer is a).