Study the Situation then answer the Financial Issues

1. 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 will short 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. Prepare a profit & loss on the S&P500 futures showing what will happen if the S&P500 index moves from 700 to 1300 for Mike or fall from 1300 to 700 for Sheila

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