Question

Farmer Bob is concerned about the “plantin” so he hedged this position with a Sept ’21 futures contract on wheat. The initial and maintenance margins on wheat futures are $1,485 and $1,350 respectively. Each contract is on 5,000 bushels. a. Did he go long or short? why? b. Complete the following marked-to-market chart. Be sure to indicate any margin calls.

Day

Settlement

Price (per Bushel)

Cash Flow

Margin Account Balance

Margin Call?

0

.53

1

.57

2

.59

3

.43

Answer 1

Solution:-

A). Farmer Bob has gone short on the future because he is worried about the fall in prices of wheat in the near future which will be going to produce.

A Short position in wheat will protect BOB from Future price Fall.

B). Initial Margin = $ 1485, Maintainance Margin = $ 1350,

Contract Size = 5000 Bushels.

Day	Settlement Price (Per Bushels)	Cash Flow	Margin Account Balance	Margin Call
0	0.53	$           -	$ 1,485.00
1	0.57	$ -200.00	$ 1,285.00	$ 200.00
	Margin Call	$ 200.00	$ 1,485.00
2	0.59	$ -100.00	$ 1,385.00
3	0.43	$ 800.00	$ 2,185.00

Note:- Starting at day 0 we sold futures at 0.53 then at day 1 as price goes up we incur loss (0.57-0.53)*5000=$200

As Margin account balance falls below the maintenance margin, margin call took place to maintain margin account balance.

Note: Only Cash flows related settlement has been shown above.

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