Part B: Global Futures Markets
Due date: Beginning of Class 7
B.1 You have been given US $300,000 to invest in a combination of futures contracts and a money market fund.. If you go slightly over the US $300,000 then you can borrow at 7% (annualized). If you are under, then invest in a money market fund at 5% (annualized). If there are big differences, you will have to downsize/upsize your trades. You must liquidate your position no later than the close of trading on the trading day before the assignment is due. Your $300,000 should be used either as margin for futures positions (also earning 5% annually), or set aside in a money market fund earning 5% (annualized).
You may go long, short, or spread as many contracts as you wish on any futures market quoted in the WSJ or on the internet. Fractional positions are not allowed, but you may hold contracts in any global market. Refer to Appendix A for information on retrieving prices. Refer to Appendix B for information on constructing futures contract symbols. Initial and maintenance margins are those for small speculators quoted in Margin Tables.
Along with your position, you must submit an estimate of your leverage employed for each commodity based upon your allocation of the $300,000 to the various positions that you take. You should also show the ratio of your allocation of funds to each position to the margin required for the position. Finally, you should obtain an estimate of the percentage (annualized) standard deviation of an unlevered position in each of your contracts, and compute an estimate of your standard deviation as a fraction of your equity investment in each contract.
The best estimate of volatility is the implied (annualized) volatility for the corresponding option. A crude measure of the annualized standard deviation is 4 times the margin on the contract. I will hand out hard copies of the Goldman Sachs volatility review.
I have also collected margin information from a top brokerage house. This is available in Margins.
The sample of the table that you should use to present this information is the following:
|
Position 1 |
Position 2 |
Totals |
|
| Futures market |
Treasury bonds |
Live cattle |
|
| Exchange |
CBT |
CME |
|
| Contract month |
June 1992 |
June 1993 |
|
| Long or short |
Long |
Long |
|
| Number of contracts |
10 |
10 |
|
| Value per contract (aprox.) |
$66,000 |
$27,000 |
|
| Total value of assets |
$660,000 |
$270,000 |
$930,000 |
| Margin per contract |
$2,000 |
$1,200 |
|
| Total margin of position |
20,000 |
12,000 |
$32,000 |
| Money market reserve |
188,000 |
80,000 |
268,000 |
| Total equity committed |
208,000 |
92,000 |
300,000 |
| Ratio: Equity/margin |
10.400 |
7.667 |
9.375 |
| Leverage: Assets/equity |
3.17 |
2.93 |
3.10 |
| Annual $ std dev/contract |
8,000 |
4,800 |
|
| Total $ std dev position |
80,000 |
48,000 |
|
| Ratio: Total $ std dev/assets |
12.12% |
17.77% |
|
| Ratio: Total $ std dev/equity |
38.46% |
52.17% |
With both your futures assignment and the options assignment, you may change your portfolio by making trades during the time you hold your portfolio. Bear in mind that each of these trades increases your record keeping requirements in Part D.
To initiate a trade, use the following TRADE FORM
If your funds for one position are insufficient to meet its margin calls and you have excess funds in another position, then you may shift funds across accounts. However, if your total equity balance ever becomes insufficient to cover total margin requirements, then you must liquidate some of your position.
Hand in a table as described above indicating your cash and futures contract position.