On Monday morning, an investor takes a long position in a pound
futures contract that matures on Thursday afternoon. The agreed
upon price is $1.50. The contract size is ÃÂ£62,500. At the close of
trading on Monday, the futures price goes to $1.65. At Tuesday
close, the price goes to $1.70. At Wednesday close, the price goes
to $1.45, and on Thursday close the price goes to $1.30 and the
contract matures. The initial performance bond is $2500 and the
maintenance performance bond is $1500. If the account falls below
the maintenance level then the margin account must be brought back
to the initial margin level. Detail the daily settlement process.
What will be the investor’s profit (loss)?
.a.Carefully detail the daily settlement process. What will be
the investor’s profit (loss) for each day? What is the total profit
or loss for the period?
b.What would the profit or loss be if the investor had taken a
short position (you do not need to detail the daily settlement
process for this question?
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c.Why are futures contracts important in risk management and