Question

You have a short position in one corn futures contract. Each futures contract calls for the delivery of 5,000 bushels of No. 2 yellow com. The initial margin was $2,500 and the maintenance margin is $1,250. At the close of trading yesterday, the futures price was $5.23 per bushel and the balance in your margin account was $1 ,750. Today, the settlement price for corn futures is $5.43. What is the balance in your account at the end of today's trading? Assume that you made the minimum deposit necessary if there was a margin call.

A) $1,750

B) *$2,500

C) $3,250

D) $ 1 ,500

Looking for the process work to understand why the solution is B) $2,500.

Answer 1

Margin balance is increased by Profits and decrease by Loss. If margin get reduced below maintenace Margin, margin call is made and balance of initial margin is maintained.      
      
Profit or loss on position = (Short sale or closing price - Buying or long price on specific day)*Contract size      
Contract size =    5000 bushels  
Last closing value of future=   5.23  
Today settlement price (long price)=   5.43  
      
Profit or loss =(5.23-5.43)*5000      
-1000      
Previous margin is $1750. Today loss is 1000.      
So balance margin = 1750-1000= 750      
Margin has reduced below maintenace margin of $1250. So margin call is made for Amount= Initial margin - balance margin       
2500-750=   1750  

So you have deposited margin call of $1750 (as assumed in question).

So your closing balance today is 750 balance+1750 deposit = $2500  

Answer is B.

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