Spot markets

# Spot markets

For this problem set Use Excel, LibreOffice calculator, R or any software of your choice to do your calculations. If you are feeling brave, you can use a calculator.

## Spot markets

1. You buy 10,000 bushels of corn at 352 cents per bushel on the spot market.

· Are you long or short corn?

(1)

· After one day, the spot price changes to 323.49. According to Equation (1), what is the value of Pt,Ko,Qo?

· What are your profits?

· Compute the Mark to market (MTM) of your position from = 1 to = 8 using the data provided on Canvas. Show your MTM for each period.

· After = 8 you see that prices are recovering and you decide to sell half of your position at = 11. What are your profits on that particular share of your trade?

i.e. for the 5,000 bushels sold

· At = 12, what is the profit of your trade? (Profit/loss of your closed position

+ current MTM).

At = 13 what is the profit of the trade?

· At = 13 you read on the news that a terrible fire has damaged the 20% of this year’s crops in the U.S. If you are a speculator, would you go long or short the corn futures contract? Why?

· Plot the price of the corn futures contract from = 1 to = 25. Did the price of corn behave as you expected?

2. What does it mean to short sell an asset?

3. Suppose that the fee for short selling as asset is the 0.25% of the spot price at the moment of the sale for each month that passes.Suppose you short sell gold 10,000 oz at 1,256

· If you want to close this trade in two month’s time, what would the price have to be for you to break even[footnoteRef:1]? [1: Break even means to have zero profits]

· When you close your position, which two transactions you would have to make?

· Using the prices for the XAUUSD example provided on Canvas, what is you profit if you close your position at = 16. What is the profit you would have to pay if there was no fee?

· Make a graph in which you plot the profits from you position taking into account the shorting fee and without taking it into account?

· What to the difference between these two profits as time goes by and this position is not closed?

· Suppose the shorting fee increases to 1% per month, what happens to the difference in profits? What if it increases to 2%?

· Show a graph of the difference in profits in the two cases mentioned earlier.

4. Recall Equation(1). Suppose Q0 = 1unit and you go long at a price of 5.

• Draw your profits as a function of the spot price Pt.

What is the slope of this function? How much would your profits change if the market price increases by one unit? What is the intercept of this function? At what spot price would your profits equal zero? Indicate all of these points in a graph.

5. Suppose you short 1 unit at 7. Draw the same graph as in point (4) (Include all

relevant elements)

6. Sum the functions from Equation(1) for the different spot prices at which you opened the trades on Point(4) and on Point (5). Plot the profits as a function of the market

price.

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