Q4. A buyer of a futures contract on Gold bullion with an underlying value of...
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Q4. A buyer of a futures contract on Gold bullion with an underlying value of 100,000 on 10 November is required to deliver an initial margin of 5 per cent to the clearing house. This margin must be maintained as each day the counterparties in the futures are marked to market. Required: (a) Display a table showing the variation margin required to be paid by this buyer and the accumulated profit/loss balance on her margin account in the eight days following the purchase of the future. (Assume that the maintenance margin is the same as the initial margin.) [ (b) Explain what is meant by 'gearing returns' with reference to this example. (Hint: gearing has the same meaning as leverage, note how the returns in the Gold Bullion are amplified in the futures contract and comment on it.) ( 75 words max) (c) Compare forwards and futures markets and explain the coexistence of these two. (100 words max)
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