Distinguish between the terms open interest and trading volume

Assignment

For Assignment Module 5, respond to the following questions:

1. Distinguish between the terms open interest and trading volume.

2. What is the difference between a local and a futures commission merchant?

3. Suppose that you enter into a short futures contract to sell July silver for $17.20 perounce. The size of the contract is 5,000 ounces. The initial margin is $4,000, and themaintenance margin is $3,000. What change in the futures price will lead to a margin call?What happens if you do not meet the margin call?

4. Suppose that in September 2012 a company takes a long position in a contract on May2013 crude oil futures. It closes out its position in March 2013. The futures price (perbarrel) is $68.30 when it enters into the contract, $70.50 when it closes out its position,and $69.10 at the end of December 2012. One contract is for the delivery of 1,000 barrels.What is the company’s total profit? When is it realized? How is it taxed if it is (a) a hedgerand (b) a speculator? Assume that the company has a December 31 year-end.

5. What does a stop order to sell at $2 mean? When might it be used? What does a limitorder to sell at $2 mean? When might it be used?

6. What is the difference between the operation of the margin accounts administered by aclearing house and those administered by a broker?7. What differences exist in the way prices are quoted in the foreign exchange futuresmarket, the foreign exchange spot market, and the foreign exchange forward market?

8. The party with a short position in a futures contract sometimes has options as to theprecise asset that will be delivered, where delivery will take place, when delivery will takeplace, and so on. Do these options increase or decrease the futures price? Explain yourreasoning.

9. What are the most important aspects of the design of a new futures contract?

10. Explain how margins protect investors against the possibility of default.

Solution: