Finance with John Elder
LE#1

Chapt 1 #11-16, 26 (not to hand-in, but eligible for quiz)

Chapt 2 #10, 11, 19, 22, 23, 24   (not to hand-in, but eligible for quiz)

Suppose that effective at the close of business on Dec 21 2007, you took a long position in one June E-mini futures contract on the SP500, which is traded on the CME.   At the close of trading on Jan 14 2008, you closed out your position.   The value of this contract is linked to the value of the SP500, and has a multiplier of 50.  For example, the SP500 closed at 1484.46 on Dec 21, so the value of an E-mini futures contract that delivered on that day would be 50*1484.46.  An E-mini contract for delivery at some time in the future would control about this much, plus or minus a few hundred dollars.  Your broker instructs you that the initial margin requirement on this contract (for a speculator) is $4,500/contract, with a maintenance margin of $3,600/contract.  For simplicity assume that you do not earn interest in your margin account.

Download the Excel spreadsheet linked here, to trace the balance on your margin account and answer the following questions.  

What was the percent change in the SP500 index between Dec 21 and Jan 14?  
What was the percent change in the Futures price  between Dec 21 and Jan 14  
What was the percent return on your original investment (that is, what is your gain or loss, as a percent of your initial margin)?
Which is greater, and why?  
Compare trading in the E-mini futures contract to an alternative strategy of buying and selling $70,000 worth of individual stocks in the SP500.  Which strategy has greater leverage?  Which is likely to have lower transactions costs?
Compare trading in the E-mini futures contract to trading a similar forward contract.  How would the cash flows differ?

Print out your spreadsheet and responses to these questions, to hand in at the beginning of class.

OTIS:  (All otis assignments are optional) Take a long position in one futues contract and go long one call option contract on one stock.
Look up and record the value of intial margin on the futures contract, as well as the maintenance margin. E.g., to find the margin requirement on the S&P 500 mini index futues, go to http://www.cme.com and look at "performance bond";  see also "contract specifications.  Record your answer in you OTIS journal.