In: Finance
An investor enters into 5 S&P 500 long futures contracts, each of which is currently trading at 2,150. You are given:
Suppose the futures price one day later is 2,100 and the investor receives a margin call.
Calculate the amount of funds the investor needs to provide to satisfy the margin call.
8,700
12,500
41,000
62,500
PLEASE PROVIDE THE FULL SOLUTION
76,000
Working Note :1 - Basic information
Current value of S&P 500 = 2150
Notional value per contract of S&P 500 futures = $ 537,500 (250*2150)
No. of contracts entered = 5
Total Notional value of 5 contracts = 2,687,500 (5*537500)
Working Note 2 : Computation of initial margin and maintenance margin
Initial Margin = 10% * Total notional value of contract
= 10% * 2687500 ( W.N.1)
= $ 268,750
Maintenance margin = 80% * initial margin
= 80% * $ 268750
= $ 215,000
Working Note 3 :- Calculation of amount investor need to provide to satify the margin call, when the value of S&P future is 2100 -
Loss when the value of future is 2100 one day later
= (2150-2100)* 250 times* 5 contracts
ie. = 50*250*5
= $ 62500
Balance in Margin account after deducting the loss incurred = 268750 - 62500
= $ 206,250
Since the balance in margin account is less than maintenance margin ($ 215,000) , entire loss of $ 62500 need to deposited to the margin account ($ 268750 - $ 206250). (refer note)
Working note 4 :- Conclusion
Hence the amount of fund investor need to provide to satisfy the margin call is Rs. $ 62,500.
Note :-
1) Initial margin means the margin which is deposited at the inception of the contract
2) Maintenance margin means the margin which should be maintained at all times, and if the margin falls below the maintenance margin , then immediately it need to bring back the margin balance to the inital margin.
3) In future contracts, margin is a deposit made with the broker inorder to open a position. There are no interest charges on future margin because it represents a deposit held with the broker to open a contract. Hence, interest earned on margin balance is irrelevant with respect the question.