Question

Suppose the FAMA index futures is currently at 10,000 and the initial margin is 12%. You wish to enter into 30 FAMA short futures contracts. Each contract consists of 200 FAMA futures.

What is the notional value of your position?

What is the value of the initial margin?

At what futures price will you get a margin call if the maintenance margin is 70%.

Suppose you earn a continuously compounded rate of 5.5% on your margin balance and your position is marked to market weekly. What is the balance in your margin account at the end of each week if the futures contract on the index has the following values?

Week	Futures Price
0	10000
1	9500
2	11200
3	10500

Answer 1

Ans

Before solving this Question, let us Understand few Terms used in the Question :

• INITIAL MARGIN : Initial Margin is a type of Initial Deposit which must be deposited by an Investor before entering into Futures Contract.
• MAINTENANCE MARGIN : It is a LIMIT or DEADLINE below which our Initial Margin should not fall

(i) Notional Value of our Position = Index Value * No. of Futures per Contract * No. of Contracts

= 10000 * 200 * 30

= 60000000 (ie. 60million)

(ii) Value of Initial Margin = Contract Value * Rate of Initial Margin

= 60000000 * 0.12

= 7200000 (ie. 7.2million)

(iii) Before calculating At what futures price will we get a margin call, We need to calculate Maintenance Margin :

Maintenance Margin = Initial Margin * Rate of Maintenance Margin

= 7200000 * 0.70

= 5040000

Future Price at which we will get a Margin Call = Initial Futures Price (-) Acceptable Fall in Price

= 10000 (-) { (7200000-5040000) / (30*200)}

= 10000 (-) 360

= 9640

(iv) GIVEN :

• Rate = 5.5%pa
•   Continuous Compounding

e ^{(r * t) =} e ^{(0.055 * 0.019178)} =  0.1055% {CAN BE CALCULATED USING CALCULATOR OR EXPONENTIAL TABLE}

WEEK	FUTURES PRICE	MTM	INITIAL MARGIN	WEEKLY INTEREST	CLOSING BALANCE
1	9500	(3000000) {ie. 500*200*30}	4200000 {ie. 7200000-3000000}	7596 {ie.7200000*0.1055%}	7200000 {ie. 4200000+7596+(2992404 of MARGIN CALL since it got below maintenance margin level)}
2	11200	10200000 {ie. 1700*30*200}	17400000 {ie. 7200000+10200000}	7596 {ie. 7200000*0.1055%}	17407596 {ie. 17400000+7596}
3	10500	(4200000) {ie. 700*30*200}	13207596 {ie. 17407596-4200000}	18365 {ie. 17407596*0.1055%}	13225961 {ie. 13207596+18365}

IF ANY QUESTION REGARDING ANY CALCULATION PLEASE ASK IN COMMENT :)