Question

Katie has a long position in one December beans futures contract. The contract size is 5,000 bushels. Each contract requires an initial margin (IM) deposit of $200 and a maintenance margin (MM) of $120. Assume the initial contract price is $2/bushel. a. If the contract price increases by 2 cents on Day 1, calculate the gain or loss of Katie and the new balance (margin) at the close of Day 1. b. Does Katie need to take some action at the close of Day 1? If so, what does she need to do? c. If the contract price decreases by 1 cent on Day 2, calculate the gain or loss of Katie and the new balance (margin) at the close of Day 2. d. Does Katie need to take some action at the close of Day 2? If so, what does she need to do?

Answer 1

	Initial value of contract = 5000*2 =	$              10,000
	Initial margin	$                    200
	Maintenance margin	$                    120
a)	Since the initial contract is a long position the increase in
	price will result in a gain to the extent of 5000*0.02 =	$                    100	Gain
	New balance in margin account = 200+100 =	$                    300
b)	There is no need to take any action on Day 1. However, she
	can withdraw $100 (Balance of $300-Initial margin of $200)
c)	Since the initial contract is a long position the decrease in
	price will result in a loss to the extent of 5000*0.01 =	50	Loss
	New balance in margin account = 200-50 =	150
	There is no need to take any action on Day 1.