Question

You sold two Dec gold futures contracts, of size 100 ounces per contract, at a price of $400 per ounce. The margin requirement is 10% of the initial position’s value. There is no maintenance margin, but once the margin account balance falls below 8%, it has to be topped back up to at least 10% of the initial value of position.

Demonstrate marking-to-market on this position for the next 4 days, assuming settlement prices are $420, $430, $380 & $410. Show all daily settlements, including margin calls on the investor’s margin account. If you close out your position at the end of Day 4, describe the balance in your margin account.

Answer 1

Number of contracts sold = 2 | Price of the per ounce = $400 | Size of a contract = 100 ounces

Total Value of contracts sold = 2 * 400 * 100 = $80,000

Margin requirement = 10% of Initial position = 10% * 80,000 = $8,000

Threshold for Margin call = 8% of Initial position = 8% * 80,000 = $6,400

Initial Margin Balance becomes = $8,000

Mark-to-Market for Next 4 days.

As Contracts have been sold, therefore, if price of contract goes up, it leads to negative effect on investors position because investor benefits with fall in prices.

Day 1: Settlement Price = $420 | Tota Value at Day 1 for 2 Contracts = 2 * 420 * 100 = $ 84,000

Beginning margin account balance = $8,000

Change in Value of position at $420 = Initial value of position - Current value of position = 80,000 - 84,000 = $ -4,000

Ending Margin Account Balance at Day 1 = Beginning Margin account balance - Change in balance after settlement

Ending Margin Account Balance at Day 1 = 8,000 - 4,000 = $4,000

Margin Call Status = Yes (As Margin account balance is lower than 6,400 which is the minimum requirement)

Margin call requires investor to bring back the balance of the margin account to Initial margin balance of $8,000 by depositing the loss in value of the position of $4,000

Cumulative Loss = $-4,000

Day 2: Settlement Price = $430 | Tota Value at Day 2 for 2 Contracts = 2 * 430 * 100 = $ 86,000

Assuming margin call from previous day has been settled

Beginning margin account balance = Ending Balance at Day 1 + 4,000 = 4,000 + 4,000 = $8,000

Change in Value of position at $430 = Previous day's value - Current value of position = 84,000 - 86,000 = $ -2,000

Ending Margin Account Balance at Day 2 = Beginning Margin account balance - Change in balance after settlement

Ending Margin Account Balance at Day 2 = 8,000 - 2,000 = $6,000

Margin Call Status = Yes (As Margin account balance is lower than 6,400 which is the minimum requirement)

Margin requires investor to bring back the balance of the margin account to Initial margin balance of $8,000 by depositing the loss in value of the position of $6,000.

Cumulative Loss = Loss from previous day + loss from day 2 = -4,000 - 2,000 = $ -6,000

Day 3: Settlement Price = $380 | Tota Value at Day 3 for 2 Contracts = 2 * 380 * 100 = $ 78,000

Assuming margin call from previous day has been settled

Beginning margin account balance = Ending Balance at Day 2 + 2,000 = 6,000 + 2,000 = $8,000

Change in Value of position at $380 = Previous Day's value - Current value of position = 86,000 - 76,000 = $10,000

Ending Margin Account Balance at Day 3 = Beginning Margin account balance - Change in balance after settlement

Ending Margin Account Balance at Day 3 = 8,000 + 10,000 = $18,000

Margin Call Status = No (As Margin account balance is above $6,400 which is the minimum requirement)

Cumulative Gain = Cumulative loss from previous day + Cumulative Gain in day 3 = -6,000 + 10,000 = $4,000

Day 4: Settlement Price = $410 | Value at Day 4 for 2 Contracts = 2 * 410 * 100 = $ 82,000

Beginning margin account balance = Ending Balance at Day 3 = $18,000

Change in Value of position at $380 = Previous day's value - Current value of position = 76,000 - 82,000 = $-6,000

Ending Margin Account Balance at Day 4 = Beginning Margin account balance - Change in balance after settlement

Ending Margin Account Balance at Day 4 = 18,000 - 6,000 = $12,000

Margin Call Status = No (As Margin account balance is above $6,400 which is the minimum requirement)

Cumulative Loss = Cumulative Gain from Previous day + Cumulative Loss in Day 4 = 4,000 - 6,000 = $-2,000

The Ending Balance at Day 4 is 12,000 which comprises of two Margin call settlements of 4,000 at Day 1 and 2,000 at Day 2. This leads to Cumulative Loss of $2,000 for the investor.