Question

Assume that on a recent day, the September 2019 S&P Index futures contract (i.e., the S&P contract which expires in September) closed at 2890, up 7 points on the day. The value of the contract is set at 250 × the index.

When you bought the contract, you had to put up initial margin of $35,000. The maintenance margin is $31,000. At what contract price will you get a margin call?
Explain.

Answer 1

Initial margin is the margin that is required to open a trade in the market. The maintenance margin on the other hand is the number on breach of which the investor will have to provide money to take the margin level back to the initial margin level. The same can be solved as follows:

Total Value of S&P 500 future is 2890 points * $250 = $7,22,500

Initial margin required is $35,000, while the maintenance margin required is $31,000

Hence, there is a buffer of $4,000, it is the amount of loss that can be borne by an investor without hitting the requirement of a margin call, as soon as the loss will be more than $4,000 and the maintenance margin of $31,000 is breached, the margin call will be triggered.

Since every point of decrease will lead to a loss of $250,

$4,000 / $250 = 16 points.

Current Price of S&P future = 2890

Price at which margin call will be triggered = 2890 - 16 points

                                                              = 2874 points

At this price ( or a bot lower than this) , the maintenance margin will be breached and margin call will be triggered.