Question

The Eurodollar futures contract (ED) has contract size of $1 million, a tick size of 0.005% and a tick value of $12.50 per tick. If the initial margin is $300 and the maintenance margin is $250, how much additional deposit per contract does an investor have to make to the account (to keep the account open if fell below maintenance) if the price of the contract moves from $99.875 to $99.850 ?

$62.50

$50.00

$0

$125.00

Answer 1

Contract size = $1 million | Tick size = 0.005 | Value of a tick = $12.50

Initial margin = $300 | Maintenance margin = $250

Change in balance in account with each 0.005 change = $12.50

Initial price = 99.875

Current Price = 99.850

Total change = 99.850 - 99.875 = - 0.025

Change in terms of number of ticks = Total change / Tick size = - 0.025 / 0.005 = - 5

The contract has gone down by 5 ticks.

Change in balance of account = Change in terms of number of ticks * Value of a tick

Change in balance of account = - 5 * 12.50

Change in balance of account = - 62.50

Account Balance after the change = Initial margin - Change in balance of account

Account Balance after the change = 300 - 62.50 = $237.50

The Balance in the account has gone below Maintenance margin by $12.50.

Once Margin account balance goes below Maintenance margin, a Margin call is triggered and investor is required to bring the margin balance upto to the original initial margin levels by depositing additional funds.

Overall change in account balance from Initial margin = - 62.50

Therefore, Additional funds to be deposited = $62.50

Hence, $62.50 is required to be deposited to bring the balance back to Initial margin requirement which is the 1st Option among the given choices.