Question

Suppose you enter into a long futures contracts to buy crude oil for $31.50 per barrel. The size of a contract is 10,000 barrels. The initial margin is $8,000 and the maintenance margin is $ 6,000. What change in the futures price will lead to a margin call? Please explain your answer.

Answer 1

Answer -

There is a margin call when the initial margin falls to maintainance margin

Change in future price of 0.20 will lead to a margin call

when the futures price fall by 0.20 there will be a loss of 2000 (ie 0.20*lot size of 10000)

This loss will be reduced from our margin account of 8000, now the new margin balance will be 6000 and will lead to a margin call.

Step 1 - Contract value of futures contract

Contract Value = 31.5 * Lot Size

Contract Value = 31.5 * 10000 = 315,000

Step 2 - Margin Concept explanation

i) To enter into a contract to long futures with contract value ($ 315,000) we have to deposit an initial margin of $8000

ii) If there is a fall in the value of contract value by 2000 (ie contract value 313,000) we will recieve a margin call

Step 3 - Futures price when contract value of 313,000

Contract Vlaue = Futures Price * Lot Size

313000 = Futures Price * 10,000

Futures Price = 31.3

Step 4 - calculation of change in futures price

Change in futures price = 31.5 - 31.3 = 0.20