Week 1- Introduction

Question 1

β = 0 there is no … risk and the expected return is …

Answer 1

systematic
RF

Question 2

A trader enters into a short cotton futures contract when the futures price is 50 cents per pound. The contract is for the delivery of 50,000 pounds. How much does the trader gain or lose if the cotton price at the end of the contract is (a) 48.20 cents per pound; (b) 51.30 cents per pound?

Answer 2

a) The trader sells for 50 cents per pound something that is worth 48.20 cents per pound. Gain = ($0.5000 − $0.4820) × 50,000 = $900.

b) The trader sells for 50 cents per pound something that is worth 51.30 cents per pound. Loss = ($0.5130 − $0.5000) × 50,000 = $650.