Study the Situation then answer the Financial Issues

timer Asked: Mar 3rd, 2014

Question description

Suppose that we have two investors: Mike and Sheila. On 20th August the cash S&P 500 Index is 1007 and the December futures is 1000. Mike is convinced that the cash S&P Index will be considerably higher in three months’ time rising from 1007 to 1200 well above the December futures price of 1000. On the other hand, Sheila feels that the market is overvalued and is headed for a fall and predicts that the cash market will fall to 800. As a result Mike longs the futures contract at 1000, while Sheila shorts the futures at 1000. If the initial margin on the contract is set at 50 points then the initial margin deposit by each party will be 50 points x $250 per point = $12,500. 

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