A buyer of a futures contract in Imaginationum with an underlying value of £400,000 on 1...

A buyer of a futures contract in Imaginationum with an underlying value of £400,000 on 1 August is required to deliver an initial margin of 7.5 per cent to the clearing house. This margin must be maintained as each day the counterparties in the futures are marked to market.

Required:

(a) Display a table showing the variation margin required to be paid by this buyer and the accumulated profit/loss balance on her margin account in the eight days following the purchase of the future.

(Assume that the maintenance margin is the same as the initial margin.)

(b) Explain what is meant by ‘gearing returns’ with reference to this example. (Hint: gearing has the same meaning as leverage, note how the returns in the Imaginationum are amplified in the futures contract and comment on it.) (75 words max)

(c) Compare forwards and futures markets and explain the coexistence of these two. (100 words max)

Expert Solution

ekkarill92 answered 2 years ago

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