MAF308 Initial Margin Requirement Assignment Sample

Derivative and Fixed Income Securities - Question 1

Part I

Initial margin requirement= 60000 x 15.29 x 10% X 2 cents + $ 1200

= $ 3,035

Loan from broker = 60000 x 15.29 x 2 cents x 90%

= $ 16,513

 Margin call= 16,513/1-0.10= $ 18,347

Hence, price at which margin call will be recd= 18,347*100/(60,000*2)= 15.28 cents

Part II

Higher the volatility, higher the futures price. Hence, the initial margin requirement will also increase

Derivative and Fixed Income Securities - Question 2

Part I

Price of Call Option= Intrinsic value of call option + Time value of call option

Intrinsic value of call option (XYZ July 40)= $ 45- $ 40= $ 5

Since, price of one of the option is $ 8, it is price of XYZ July 40 call as time value of option can not be negative

Hence, time vlue of XYZ July 40 call = $ 3 and price is $ 8

Part II

Under Strategy A, the buyer of the option can buy share at a strike price of $ 40

Under Strategy B, the buyer of the option can buy share at a strike price of $ 50

Hence Strategy B offers a higher level of protection.

Derivative and Fixed Income Securities - Question 5

Part I

• Theoritically, it is possible for an out of the money European call an in-the-money European put to be trading at the same price. Although, Intrinsic value of an out of the money European call option is zero, it can have more time value as time value of an option depends upon underlying price, exercise price, time to expiration, risk-free rate, volatility, and interim cash flows & costs.
• By simultaneously buying a call and short-selling the underlying asset, we can create a synthetic short position in the put option.

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