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trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery...

trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call? Under what circumstances could $2,000 be withdrawn from the margin account?

Expert Solution

Contract Size = 15,000 | Current Futures Price per pound - 160 cents or $1.60

Total Contract Size bought = 15000 * 2 = 30000

Initial Margin = 6000*2 = 12000 | Maintenance Margin = 4500*2 = 9000

The Value of the futures contract bought should go down by $ 3,000 to lead to a margin call.

Value Change = (Current Price - New Price)*30,000 (Price decline is expected - Current Price > New Price)

As value change should equal 3,000, therefore:

=> 3000 = (1.60 - P)*30000

=> 3000 / 30000 = 1.6 - P

=> P = 1.60 - 0.1 = $ 1.50

The price per pound need to fall by 10 cents to $1.50 or 150 cents for margin call to happen.

To withdraw $ 2000, we would use the same concept as for margin call. The value of the futures contract bought should increase by $ 2,000 to be able to withdraw $ 2,000 from the margin account.

Value Change = (New Price - Current Price) * 30,000 (Price rise is expected - New Price > Current Price)

As value change should equal $ 2,000 for withdrawal, therefore:

=> 2,000 = (New Price - Current Price) * 30,000

=> 2000 = (P - 1.60)*30000

=> P = 2000 / 30000 + 1.60 = 0.067 + 1.60

New Price = $1.66 or 166.67 cents

Hence, The price should increase by 0.67 cents to $1.66 or 166.67 cents to be able to withdraw $2,000 from the margin account.

jeff jeffy answered 2 years ago

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