Federal reserve bank of st louis liber answers

answer the questions
Subject
Economics

Question Description
1.Discuss the role of derivatives market in the financial market system.

2. Discuss the credit crisis of 2007.

3. Compare forward and futures contracts.

4. Explain basis risk.

.2.11. A trader buys two July futures contracts on orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 120 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call? Under what circumstances could $2,000 be with- drawn from the margin account?

.2.15. At the end of one day a clearing house member is long 100 contracts, and the settlement price is $50,000 per contract. The original margin is $2,000 per contract. On the following day the member becomes responsible for clearing an additional 20 long contracts, entered into at a price of $51,000 per contract. The settlement price at the end of this day is $50,200. How much does the member have to add to its margin account with the exchange clearing house?

.2.24. Explain how CCPs work. What are the advantages to the financial system of requiring all standardized derivatives transactions to be cleared through CCPs?

.3.1. Under what circumstances are (a) a short hedge and (b) a long hedge appropriate?

.3.15. ‘‘When the futures price for an asset is less than the spot price, long hedges are likely to be particularly attractive.’’ Explain this statement.

.3.16. The standard deviation of monthly changes in the spot price of live cattle is (in cents per pound) 1.2. The standard deviation of monthly changes in the futures price of live cattle for the closest contract is 1.4. The correlation between the futures price changes and the spot price changes is 0.7. It is now October 15. A beef producer is committed to purchasing 200,000 pounds of live cattle on November 15. The producer wants to use the December live-cattle futures contracts to hedge its risk. Each contract is for the delivery of 40,000 pounds of cattle. What strategy should the beef producer follow?