Question

A trader takes the long position and a hedge fund takes a short position on ten 1-month S&P 500 futures contracts at 2500. A single S&P 500 futures contract equals ($250) × (Index Value). The initial margin is $325,000 and the maintenance margin is $245,000 for both accounts. Five trading days later, the futures price of the index drops to 2,460 triggering a margin call for the trader. What is the change margin account balance (indicate gain or loss) for: a) the trader and b) the hedge fund? How much is the margin call for the trader?

Answer 1

Here we see that the trader has taken a long position and hedge fund takes a short position on 10 1month S&P 500 futures contract at 2500.

Now, 1 S&P 500 futures at the time of entering the contract = 250 * 2500 = 625,000

Therefore, value of 10 S&P 500 futures at the time of entering the contract = 250*2500*10 = 6,250,000

Now,after 5 trading days when futures price of the index drops to 2460,value of the 10 S&P futures = 10*250*2460 =6,150,000.

For Trader (since he entered long position at 2500 and now the price has fallen down to 2460) :

Loss for trader =(2500-2460)*10*250= $100,000

Initial Margin = $325,000, Margin after loss = $325,000- $100,000= $225,000

Since the margin has gone below the maintenance margin, therefore a margin call for trader is required to bring the margin back to the initial margin level.

Margin call for trader = $325,000-$225,000 = $100,000

For Hedge fund (since it entered short position at 2500 and now the price has fallen down to 2460):

Gain for hedge fund = (2500-2460)*10*250= $100,000.