# Futures - Schweser ID 88875

1. Gluck future: 9.4073 * (1.0375/1.055)^(75/365) = 9.3750 B 2. B) futures prices are higher than forward prices in Mazakhastan. because they prefer the mark-to-market feature. 3. C) Yes No Both the treasury bond future and the stock index future require the risk free rate. But the stock index future would not require the dividend yield measure. (Continuous dividend yield is what it would require). 4. Copper Spot price: \$3.15/pound. 1-year futures price: \$3.54/pound. Calculated forward: 3.15 * 1.0375 = 3.27 Commission: 3% - 3.37 Future is still overpriced. So if you buy the Copper future a quick buck thro’ arbitrage could be made. Silver Spot price: \$12.75/pound. 1-year futures price: \$12.82/pound. 12.75 * 1.0375 * 1.03 = 13.62 -> Sell the future so you can make the money thro’ arbitrage. Molybdenum Spot price: \$34.45/pound. 1-year futures price: \$35.23/pound. Moly: 34.45 * 1.0375 * 1.03 > 35.23 – you would sell it - Given the choices B) Buy copper, sell silver, and sell molybdenum. C) Buy copper, sell silver, and do not trade molybdenum. I am inclined to go B… but I know the answer that Schweser gives is C. (Do not understand why). 5. Eurodollar future: (1+0.079*90/360) -1 = Add on yield = 0.01975 So future price = (1-0.01975) * 1 Mill = 980250 --> closest answer is 981171. B. Brent Lekvin Manager from Schweser has written this to me in an email regarding this question: “Yes, I see your point on this. The problem assumes that the rate given is an effective yield, which differs from market convention. Fortunately, the answer given is “closest” to the value that would also be derived using LIBOR convention (\$1m x (1 - 0.079/4) = \$980,250 according to my calculations). We’ll mark this item for review in the “off season” which comes after June 6.”. 6. Contango situation would be caused if Shortage of warehouse space drives up rental rates.

Q1. B [9.37502245 G/\$] Q2. B [Fut>fwd] Q3. C [RFR for both and ‘individual’ dividend rate for none] Q4. B [buy gold, sell gold future][sell silver, buy silver future][sell moly, buy moly future] Q5. B  Q6. B [shortage raises cost of storage and hence future cost > spot = contango]

Q5 answer is counterintuitive… ‘’ To calculate the expiration value of a 150-day eurodollar futures contract using 90-day LIBOR, the only interest rate provided that works for the contract, we do the following: Divide \$1,000,000 by (1 + expected 90-day LIBOR, 60 days from now). If expected annualized LIBOR is 7.9%, the actual interest rate expected for the 90-day period is 1.92%, or (1 + 7.9%).25 − 1. Thus, the expiration value is closest to \$981,171. ‘’ If Libor 90 is annualized, then we should divide it by 4… Not raise it to power 0.25 to get rates for 90 days… What’s do you think?

ans to VinceMTLs question above: I had written to Brent Lekvin, Schweser’s Level II Manager about this as follows: "Why is the ^0.25 convention being used for a EuroDollar future based on the LIBOR? Shouldn’t the (1+0.079/4) convention have been used instead? There is no details provided in the book about calculating this amount —> but the question shows up in Qbank. Thanks for your clarification. " And here’s his response: “Yes, I see your point on this. The problem assumes that the rate given is an effective yield, which differs from market convention. Fortunately, the answer given is “closest” to the value that would also be derived using LIBOR convention (\$1m x (1 - 0.079/4) = \$980,250 according to my calculations). We’ll mark this item for review in the “off season” which comes after June 6.”.