Question

Use the following information to answer the next four questions.

Your business (US company) will receive a payment of 150,000 British pounds. You have decided to fully hedge your company’s foreign exchange risk with futures contracts. Each futures contract for British pounds has an initial margin of $1500 and a maintenance margin of $1100. Each futures contract has 25,000 British pounds attached. You open your position on 11/30/2018 when the futures price was $1.955 per pound. The table below shows the futures prices for the three days immediately after you opened your position.

	12/1/2018	12/2/2018	12/3/2018
Futures Price	$2.005	$2.009	$1.995

1) Find your initial margin balance on the day you opened your position.

2) Find your ending margin balance on 12/1. Assume any deficits are eliminated to keep the position open and any excesses remain in the account.

3) Find your ending margin balance (in dollars) on 12/3.  Assume deficits are eliminated to keep the position open and excesses remain in the account. Do not use currency symbols or words when entering your response.

4) Find the total amount of variation margin that occurred from 11/30-12/3.

Answer 1

To hedge the position, the person will sell the futures contract

Amount to be hedged = 150000 pound

Size of 1 future contract = 25000 pound

Number of Contracts = 150000/25000 = 6

Exchange Rate on 11/30 = $1.955 per pound

Initial Margin = $1500

Maintenance Margin = $1100

1. On 11/30 Initial Margin Balance = $1500*6= $9000

2. On 12/1 Spot price = $2.005 per pound

Difference = $2.005-1.955 = $.050

Margin required = 0.050*25000= $1250 per contract

Margin Balance = $1500-$1250=$250

Since this margin is below maintenace margin , amrgin call will be generated to replenish the margin to initial margin level

Ending Margin Balance = $250 per contract

Variation Margin = $1250 per contract

therfore at the end of 12/1 - Intial Margin =$1500 per contract

3. On 12/3 Spot Price = $1.995 per pound

Difference = $1.995-$1.955 = $0.04

Margin required = 0.04*25000 = $1000

Margin Balance = $1500-$1000=$500

So, as margin call is generated

Variation Margin = $1000

Therefore at the end of 12/3 Intial Margin =$1500 per contract

4. Total Amount of variation Margin

$1250+$1000=$2250 per contract