Question

Questions 11 and 12 below are based on the following information and assumptions:

• AAA takes a Long position in 1 futures contract on cheese. The cheese futures contract has contract size = 100 units (multiplier).
• BBB takes a Short position in 1 futures contract on cheese. The cheese futures contract has contract size = 100 units (multiplier).
• The value of 1 futures contract is $10,000 (= $100 *100).
• The Margin Account is 10% of the value of a futures contract, i.e., the Margin Requirement is $1000 (This is also the Initial Margin).
• The Maintenance Margin = 75%*$1000 = $750
• The following table provides information of Futures Price (ܨ_௧) from Time 0 to 3:

Time t	Futures Price (ࡲ࢚)	Change in Dollar Value of One Futures Contract from time t-1 to t (note: each contract has multiplier = 100)
Time 0	$100
Time 1	$101	= +$1*100 = +$100
Time 2	$105	= +$4*100 = +$400
Time 3	$105	= $0*100 = $0

11. Question: given the above information, when does AAA (with Long position in futures) experience a Margin Call?

1. AAA experiences a margin call at Time 2 only
2. AAA experiences a margin call at Time 3 only
3. AAA experiences margin calls at Time 2 and Time 3
4. AAA does not experience any margin call from Time 1 to Time 3

Answer: _______________

12. Question: given the above information, when does BBB (with Short position in futures) experience a Margin Call?

1. BBB experiences a margin call at Time 2 only
2. BBB experiences a margin call at Time 3 only
3. BBB experiences margin calls at Time 2 and Time 3
4. BBB does not experience any margin call from Time 1 to Time 3

Answer: _______________

Answer 1

11. Question: given the above information, when does AAA (with Long position in futures) experience a Margin Call?

Option D AAA does not experience any margin call from Time 1 to Time 3

Because the AAA took long position in futures contract which means the AAA will receive margin call only if the price of future contract reduces in future which hasn't happened between time 1 to time 3

12. Question: given the above information, when does BBB (with Short position in futures) experience a Margin Call?

Option A BBB experiences a margin call at Time 2 only

Because the BBB took Short position in futures contract which means the BBB will receive margin call only if the price of future contract increases in future which happened in time 1 and time 2 but increase of price in time 1 is not enough to raise a margin call because we need increase in Future contract value of at least $250 to make a margin call which raises in Time 2 where the chnage in value is $400 which is more than $250 Thus the BBB will receive the call in time 2 only