You expect the stock market to decline, but instead of selling

| June 13, 2016

Question
You expect the stock market to decline, but instead of selling stocks short, you decide to sell a stock index futures contract based on an index of New York Stock Exchange common stocks. The index is currently 600 and the contract has a value that is $ 250 times the amount of the index. The margin requirement is $ 2,000 and the maintenance margin requirement is $ 1,000.

a) When you sell the contract, how much must you put up?

b) What is the value of the contract based on the index?

c) If after one week of trading the index stands at 601, what has happened to your position? How much have you lost or profited?

d) If the index rose to 607, what would you be required to do?

e) If the index declined to 594 ( 1 percent from the starting value), what is your percentage profit or loss on your position?

f) If you had purchased the contract instead of selling it, how much would you have invested?

g) If you had purchased the contract and the index subsequently rose from 600 to 607, what would be your required investment?

h) Contrast your answers to parts ( d) and ( g).

i) At the expiration of the contract, do you deliver the securities you contracted to sell?

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