Question

Use the following to answer the next three questions.

On 3/1/XX, you opened a short position in wheat futures contracts. Each contract has 5000 bushels of wheat attached, and each bushel traded at $4.30 at the time you opened your position. Your initial and maintenance margins per contract are $3325 and $2150, respectively.

If you shorted 6 futures contracts, how much did you have to place in your margin account on 3/1? Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

Find your ending margin balance on 3/2 if wheat futures closed at $4.34/bushel that day.  Assume deficits are eliminated to keep the position open. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

Find your return on invested capital if you close your position on 3/3 when the futures price is $4.31/bushel.

		-.015
		.015
		.0451
		-.0451

Answer 1

1.) Margin Reuirement on 3/1/XX:

Initial margin required per contract = 3325

Number of contracts = 6

Total initial margin required as on 3/1/XX = Initial margin/contract x Number of contracts

= 3325 x 6 = 19,950

2.) Ending margin balance on 3/2/XX:

Price of wheat futures as on 3/2/XX closing = 4.34$/bushel

Difference in prices when compared to prices as on 3/1/XX = (4.3000 - 4.3400)$ / bushel = -0.0400 $/bushel

Accrued Gain or loss for 6 contracts/ 30,000 bushels = (-0.0400) * 30,000 = -1,200.0000

As you have taken short position, the increase in price has led to loss.

Hence, the loss of $ 1200 is to be adjusted in the initial margin ($ 19,950 arrived in first calculation) to calculate the ending margin balance on 3/2/XX

Margin balance on 3/2/XX = 19,950 - 1,200 = 18,750.00

3.) Return on invested capital if you close your position on 3/3 when the futures price is $4.31/bushel.

Difference in prices of 3/3/XX when compared to prices as on 3/1/XX = (4.3000 - 4.3100)$ / bushel = -0.0100 $/bushel

Accrued Gain or loss for 6 contracts/ 30,000 bushels = (-0.0100) * 30,000 = -300.0000

As you have taken short position, the increase in price has led to loss in invested capital of $ 300 and hence the return on invested capital is negative