Question

In: Economics

You enter into a futures contract to buy white maize for R1 845 per tonne. The...

You enter into a futures contract to buy white maize for R1 845 per tonne. The contract
is for delivery of 1 000 tonnes. The initial margin is R 200 000 and the maintenance margin is R60 000. You receive a margin call as R140 000 was lost from the margin account.

Question 1

What change in the futures price led to this margin call and what will happen if you do not meet the margin call?

Solutions

Expert Solution

You have purchased the futures contract that is long position.

Future price = R 1,845 per tonne

Contract size = 1,000 tonnes

Initial margin = R 200,000

Maintenance margin = R 60,000

Will receive a marginal call when the marginal account balance reduces by R 140,000.

The long position holder will receive a marginal call when the spot price of the underlying asset is less than the strike price.

Thus, a lower future price lead to marginal call.

The contract size is 1,000 tonnes then when the future price reduces by R 140,000 / 1,000 = R 140 per ton.

Thus, when future price is R 1,845 - 140 = R 1,705 per ton you will receive a marginal call.

When you receive a marginal call and you do not meet the marginal call then your marginal account will be closed and the proceed will be kept by the broker.

Thus, a decrease in price lead to marginal call. If we fail to meet the marginal call then it gives the broker the right to close the marginal account and keep the proceed after paying all the expenses.

Please contact if having any query will be obliged to you for your generous support. Your help mean a lot to me, please help. Thank you.


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