Question

1. The table shows the behavior of a futures contract on euros. Suppose you entered into the futures contract to buy €125,000 (Contract size = €125,000) at $24/€ on October 25, 2018. The initial performance bond is $6,250 and the maintenance level is $4,000.  

Date	Settlement price ($/€)	Gain/Loss	Balance
10/25/18	1.24	-----------	$6,250
10/26/18	1.25
10/29/18	1.27
10/30/18	1.22
10/31/18	1.23

1. (6 points) Fill the columns based on the price history of this contract. Please show your calculations on the gain/loss and balance.

2. (4 points) Suppose you closed out this futures contract on 10/31/18 (you were holding the contract position until 10/31/18). Calculate your total gain or loss from this futures contract.

Answer 1

a). SInce the futures contract is bought, an increase in settlement price will lead to gain and decrease will lead to loss.

10/26/2018: Change in price = 1.25 - 1.24 = $0.01/€, so gain = 0.01*125,000 = $1,250

Balance = previous day's balance + today's gain/loss = 6,250 + 1,250 = $7,500

10/29/2018: Change in price = 1.27 -1.25 = $0.02/€, so gain = 0.02*125,000 = $2,500

Balance = 7,500 + 2,500 = $10,000

10/30/2018: Change in price = 1.22 - 1.27 = -$0.05/€, so loss = -0.05*125,000 = -$6,250

Balance = 10,000 -6,250 = $3,750

Here, balance falls below the maintenance level of $4,000 so performance bond is called and amount is deposited so that balance again becomes $6,250.

10/31/2018: Change in price = 1.23 - 1.22 = $0.01/€ so gain = 0.01*125,000 = $1,250

Balance = 1,250 + 6,250 = $7,500

Formulas:

b). The futures contract can be closed on 10/31 by selling 1 contract, so on 10/31, change in price is 0.01 and loss is 0.01*125,000 = 1,250 (loss as contract is sold), so balance on Oct 31 becomes 6,250 -1,250 = 5,000

Loss on the contract = 5,000 - performance bond = 5,000 - 6,250 = 1,250 loss