QQ 101, assessment

Problem set

Work each one on paper before opening the solution. They use only what the four lessons covered.

1. Problem 1

   EUR/USD is quoted 1.0850 bid, 1.0852 ask. You buy two standard lots and sell them at once, with no change in the quote. What does it cost you?

   Show the solution

   The spread is 2 pips. One pip on a standard lot is 10 dollars, so the round trip costs 2 x 10 x 2 = 40 dollars.

2. Problem 2

   You are short one standard lot of USD/JPY at 150.20 and buy it back at 149.75. What is the profit in yen, and roughly in dollars?

   Show the solution

   The move is 150.20 - 149.75 = 0.45, which is 45 pips, because a pip is 0.01 on a yen pair. One pip on a standard lot is 100,000 x 0.01 = 1,000 yen. Profit is 45 x 1,000 = 45,000 yen. At 149.75 yen per dollar that is 45,000 / 149.75 = about 300.50 dollars.

3. Problem 3

   You buy three mini lots of GBP/USD at 1.2500 with 30 to 1 leverage. How much margin is needed?

   Show the solution

   Three mini lots is 30,000 pounds. At 1.2500 that is a position worth 37,500 dollars. Margin is 37,500 / 30 = 1,250 dollars.

4. Problem 4

   You buy two gold futures contracts at 2,040.50 and sell them at 2,031.20. Each contract is 100 troy ounces. What is the result?

   Show the solution

   The price fell by 9.30. Loss is 9.30 x 100 x 2 = 1,860 dollars.

5. Problem 5

   You are long one crude oil contract of 1,000 barrels. The expiring contract trades at 78.40 and the next one at 79.10. What shape is the curve, and what does the roll cost if the spot price does not move and the new contract ends up at spot when it expires?

   Show the solution

   The later contract is more expensive, so the curve is in contango. You sell at 78.40 and buy at 79.10, a gap of 0.70 per barrel. If the new contract falls back to spot by expiry, the position loses 0.70 x 1,000 = 700 dollars for that roll with the market itself going nowhere.

6. Problem 6

   An order book shows these asks: 100 units at 50.00, 200 at 50.02, 500 at 50.05. You send a market order to buy 400. What is your average price, and what was the slippage against the best ask?

   Show the solution

   You take 100 at 50.00, 200 at 50.02 and 100 at 50.05. Total paid is 5,000 + 10,004 + 5,005 = 20,009. Average price is 20,009 / 400 = 50.0225. Slippage against 50.00 is 0.0225 per unit, or 9 dollars in total.