Unconventional Problem

Not the type of problem, you’d see on the CFA exam, but an interesting one nevertheless. Obviously, you can’t solve the problem without knowing the data set, but just a general outline would be very helpful and most appreciated. ---------------- Choose a futures contract that has now expired on crude oil or gold. Download into Excel the complete history of daily closing prices (assume 500 obs have been downloaded, you can assume measures of central tendency, std dev, etc. whatever you need to illustrate your solution). Put yourself in the position of the exchange establishing margin requirements for the contract in the future. Estimate the initial margin necessary to ensure that the probability that an investor has an incentive to walk away from a position is less than a) 1% and b) 0.1%. ------- Would you just do a CI on this? Thanks.

Walk away from the position?! They close out your position and then take your house and your boat. Niederhoffer left an unfunded obligation of $60M at Refco and they auctioned off his colonial silver collection. It was very beautiful. If you are looking at C.I.'s and stuff - remember that it’s % change which is (maybe normal) and variability increase with time. There’s lots of ways you can do this but that’s one way.

Lola, my guess is that they just want you to calculate a CI after stating your assumptions (for example, returns are normal from the same distribution - same average and standard deviation in any point in time). Depending on who gave you the problem they might want to hear Value at Risk instead of Confidence Interval. I don’t like the wording of the problem. You really have to guess what they are looking for. I like the practical aspects Joey pointed out.

That’s what I thought. Thank you both.