University of Connecticut
Math 3615: Financial Mathematics Problems
Fall 2008
Name
Extra Credit Assignment 8 – due Tuesday 10/28/08
1. An investor takes a short position in a 1-year futures contract on Index C when the index is
at 1,000. Index C pays dividends at a continuous annual rate of 0.03.
The continuously compounded risk-free interest rate is 0.06.
The initial margin requirement for a futures contract is 10% of the value of the contract.
For purposes of this problem, assume that the futures contract is marked to market
once per month (at the end of each month during its 1-year term), that the investor’s
margin account earns interest at the risk-free interest rate, and that at all times the
futures price is equal to Index C’s no-arbitrage forward price.
The investor deposits exactly 10% of the future contract’s value into the margin
account when the contract is created. At the end of the first month, Index C has
declined to 980.
To the nearest whole number, what is the balance in the account after it is marked to
market at the end of the first month?
A. 80 B. 104 C. 112 D. 120 E. 127
