Question

QUESTION 13

Suppose that the initial margin for a given futures contract decreases, but the maintenance margin remains the same. Which of the following is true, all else being equal?

		People who buy or sell this futures contract after the margin change have the potential for more financial leverage than before.
		The change in the leverage requirement can make the contract more affordable.
		The range in which losses can occur without a margin call being triggered will decrease.
		All of the above.

Answer 1

All the above

1) People who buy or sell this futures contract after the margin change have the potential for more financial leverage than before.- Suppose the Initial Margin was initially set to $1000 and the maintenance margin was $500 so to get into a futures contract one has to pay the initial margin(financial leverage).But now suppose the Initial margin has been brought down to $800 now it is possible to use the extra ($200) i.e ($800+$200) somewhere else.

2)Change in the leverage requirement can make the contract more affordable.Suppose the Initial margin has been brought down to $800 it has become more affordable as initially, they had to pay $1000.

3)The range in which losses can occur without a margin call being triggered will decrease.- Suppose the Initial Margin was initially set to $1000 and the maintenance margin was $500 and now the Initial margin has been reduced to $700.If you suffer a $100 loss it will be paid out from the initial margin so now your margin comes to $600(700-100), similarly if you face two more such losses margin will go below maintenance margin and there will be a margin call. So opposed to a $1000 margin the range in which losses can occur without a margin call being triggered has decreased.