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In Hong Kong, the size of a futures contract on the Hang Seng stock index is HK $50 times the index. The margin (initial and maintenance) is set at HK $32,500. You predict a drop in the Hong Kong stock market following some economic problems in China and decide to sell one June futures contract on April 1. The current futures price is 7,200. The contract expires on the second-to-last business day of the delivery month (expiration date: June 27). Today is April 1, and the current spot value of the stock market index is 7,140.
a. Why is the spot value of the index lower than the futures value of the index?
b. Indicate the cash flows that affect your position if the following prices are subsequently observed:
April 1=7,200 April 2=7,300 April 3=7,250 April 4=6,900 Hang Seng Futures.
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