Trader A enters into a forward contract to sell gold for $1,600 an ounce in one year.Trader B buys a put option to sell gold for $1,600 an ounce in one year.The cost of the option is $150 an ounce. Show the profit per ounce as function of the price of gold in one year for the two traders.Be sure to include labels on the chart. Then answer the questions on the similarities/differences between these two positions:

Trader A enters into a forward contract to sell gold for $1,600 an ounce in one year.Trader B buys a put option to sell gold for $1,600 an ounce in one year.The cost of the option is $150 an ounce. Show the profit per ounce as function of the price of gold in one year for the two traders.Be sure to include labels on the chart. Then answer the questions on the similarities/differences between these two positions:

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter21: Risk Management

Section: Chapter Questions

Problem 2P

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Suppose that you bought two one-year gold futures contracts when the one-year futures price of gold was US$1,340.30 per troy ounce. You then closed the position at the end of the sixth trading day. The initial margin requirement is US$5,940 per contract, and the maintenance margin requirement is US$5,400 per contract. One contract is for 100 troy ounces of gold. The daily prices on the intervening trading days are shown in the following table. Day Settlement Price 0 1340.30 1 1345.50 2 1339.20 3 1330.60 4 1327.70 5 1337.70 6 1340.60 Assume that you deposit the initial margin and do not withdraw the excess on any given day. Whenever a margin call occurs on Day t, you would make a deposit to bring the balance up to meet the initial margin requirement at the start of trading on Day t+1, i.e., the next day. b. Fill the appropriate numbers in the blank cells in the following table. (Hint: See solution to Q19 in Lesson 2 Learning…
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