Question

You enter into a short position in one gold futures contract worth $500 per ounce. Contract size is 100 ounces. The initial margin is $2,500 per contract and the maintenance margin is $1,500 per contract.

1. How much will the price of gold have to change for you to receive a margin call and will it need to increase or decrease?

2. What is your initial margin deposit?

3. . If the market closes at $497.50 per ounce at the end of the day, what is the balance on your margin account?

Answer 1

1.

Under short selling of futures, the investor would be in a profitable situation, if the price of future contract declines. In order to calculate the margin call, the following formula can be applied:

Margin call = Margin Loan / 1 - Maintenance margin

The total value of the contract = $500 / ounce * 100 ounce per contract

   = $50,000

Initial margin deposited = $2,500 which is 5% of total contract value

Maintenance margin = $1,500 which is 3% of total contract value

Hence margin loan stands at $47,500 ($50,000 - $2,500)     

Margin call calculation:

= Margin Loan / 1 - Maintenance margin

= $47,500 / 1 - 0.03

= $47,500 / 0.97

= $48,969

The difference amount is $50,000 - $48,969 = $1,031, thus the investor will receive a ,margin call if the future falls in monetary terms $1,031, and in terms of price it will be $1,031 / 100 = $10.31

Hence, the price of future should increase by $10.31 from $500 to $510.31 to trigger a margin call for the investor, because at this stage the investor would be having a loss of $1,031 (the amount of loss that will trigger margin call).

2. The initial margin deposit for the contract will be $2,500. Maintenance margin is included in the initial margin deposit.

3. If the market closes at $497.50, the investor would be having a profit of $2.50 ($500 - $497.50). The balance in margin account will be $2500 of initial deposit + $2.50 * 100 = $250 of profit. Hence, balance in margin account will be $2750.