Question

Consider a long position of five July wheat contract futures contract each of which covers 5,000 bushels. Assume that the contract price is $2.00 per bushel and that each contract requires an initial margin deposit of $150 and a maintenance margin of $100. Compute the margin balance for this position after a 2-cent decrease in price on Day 1, a l-cent increase in price on Day 2, and a l-cent decrease in price on Day 3.

Answer 1

Each contract is for 5,000 bushels so that a price change of $0.01 per bushel changes the Contract value by $50, or $250 for the five contracts: (0.01)(5)(5,000) = $250.00.

The following figure illustrates the change in the margin balance as the price of this contract changes each day. Note that the initial balance is the initial margin requirement of $750 and that the required deposit is based on the previous day's price change.

Margin Balances

Day	Required Deposit	price	Daily Change	Gain/Loss	Balance
0 (Purchase)	$750	$2.0	0	0	$750
1	$0	$1.98	-$0.02	-$500	$250
2	$500	$1.99	+$0.01	+$250	$1,000
3	$0	$1.98	-$0.01	-$250	$750

At the close on Day 1, the margin balance has gone below the minimum or maintenance margin level of $500. Therefore, a deposit of $500 is required to bring the margin back to the initial margin level of $750. We can interpret the margin balance at any point as the amount the investor would realize if the position were closed out by a reversing trade at the most recent settlement price used to calculate the margin balance