Question

1. Consider a speculator, John Travis that expects an increase in the price of gold. On March 7th, the July futures gold contracts trade at $ 642 per ounce. John Travis takes a position in 2 July futures contracts on March 7th. The initial margin is $3,000 per contract and the maintenance margin is $2,000 per contract. The size of a futures contract is 100 gold ounces. Assume the John Travis withdraws any daily excess obtained in the futures trade. Assume the following evolution of futures gold prices for the next 5 days:

Date	Settlement Price	Daily Gains/Losses	Margin Balance	Margin Call/Cash Withdrawals
Mar 7	$642
Mar 8	$644
Mar 9	$645
Mar 10	$641
Mar 11	$630
Mar 12	$635

1. a) Fill the table above and calculate John Travis’s cumulative gain/loss at theend of March, 12th.

2. b) Assume that a clearing house member in this futures exchange has 2 clients: John Travis and Emily Ross. At the end of March 12th, both clients hold the same position on futures gold contracts i.e. the clearing house member has 4 July futures gold contracts outstanding. Considering that the clearing margin in this exchange is equal to $3,000 per contract and that at the start of March, 12th the clearing house member had $6,000 in its account, calculate the amount that this member has to transfer to its clearing account at the end of March, 12th.

Answer 1

As John Travis is expecting an increase in price, he must have taken a long position in futures contract.
In case of Long futures, the buyer makes profit when there is an increase in the value of the asset and makes a loss, if there is a fall in the value of asset.

Total Contract value = Number of contracts x size of contract x $ per ounce
                                    = 2 contracts x 100 ounces x $642 per ounce
                                    = $128400

Initial Margin = Margin per contract x no. of contracts
                         = $3000 x 2 = $6000

  Maintenance Margin = Maintenance Margin per contract x no. of contracts
                                          = $2000 x 2 = $4000

Date	Settlement Price ($)	Daily Gains/losses ($)	Margin Balance ($)	Margin call/withdrawal ($)
Mar 7	642	Nil	6000	Nil
Mar 8	644	(644-642) x 100 x 2 = 400 Gain	6400 – 400 =6000	400 withdrawal
Mar 9	645	(645-644) x 100 x 2 = 200 Gain	6200 -200 =6000	200 withdrawal
Mar 10	641	(645-641) x 100 x 2 = 800 Loss	6000 -800 =5200	Nil
Mar 11	630	(641-630) x 100 x 2 = 2200 Loss	3000+3000 =6000	3000 Margin call
Mar 12	635	(635-630) x 100 x 2 = 1000 Gain	7000– 1000= 6000	1000 withdrawal

Mar 7: As the contract was purchased at $642 and settlement price is also $642, there are no gains or losses and hence, no margin call or cash withdrawal

Mar 10: There is a loss of $800. But as the margin balance exceeds Maintenance Margin $4000, there is no margin call.

Mar 11. There is a loss of $2200. As the margin balance $3000 is less than the Maintenance Margin $4000, there will be a margin call of $3000 as the account has to brought back to Initial margin $6000.

   
Therefore, the Total gains or losses made by John Travis can be calculated as follows:

Closing Balance + Cash withdrawn – margin calls – opening balance

= $6000 – (400 +200 + 1000) – 3000 – 6000

= $1400 loss

Calculation of Amount to be deposited by clearing member in its account

As there are two clients under the clearing member and both having same positions, the total outstanding positions of the clearing member = 2 Long + 2 Long = 4 Long positions

Therefore, total clearing margin = $3000 x 4 contracts = $1200

As the clearing member already has $6000 in his account, there will be an additional requirement of $6000 to be transferred to his clearing account.