Question

You need to pay a bill of 250,000 EURO in 90 days. You have US dollars. You can buy a futures contract today                  
that allows you to buy 125,000 EURO at a rate of $1.0967 (while the spot rate is 1.088) US$ to 1 EURO that                  
matures in 90 days. Margin requirement per contract is $3,350                  
                  
The following happens.                    
                  
At the end of one month, the contract price changes to 1.09000. Since you have not settled the position, the                   
exchange requires you to adjust the margin requirement. What is the new Margin Account Value and would you be                  
able to take money out of the account or are you required to put money in? (how much)                  
                  
At the end of month two, the contract price changes to 1.07976. Since you have not settled the position, the                   
exchange requires you to adjust the margin requirement. What is the new Margin Account Value and would you be                  
able to take money out of the account or are you required to put money in? (how much)                  
                  
You now need at the 90 day mark to buy the EURO to pay the 250,000 bill due. What was your profit or loss on the                  
contract if the EURO to US$ rate is now 1.07888      

Answer 1

The futures contract is to sell the $ and to buy Euro at $1.0967/Euro . One contract is for 125000 Euro , so for 250000 Euro , 2 contracts are required

After one month, As the contract price decreases and becomes $1.0900/Euro , the contract holder suffers a loss as now the price of Euro is less than contracted.

Loss per Euro = $1.0967 -$1.09 =$0.0067

So, loss per 125000 Euro (One contract) = $837.50

The new margin balance per contract = $3350 -$837.50 = $2512.50

Total margin balance for two contracts= $2512.50 *2 = $5025

So, extra money is required to be put in equal to loss i.e. $837.50 per contract

So for 2 contracts , total extra money is required to be put in = $837.50*2 = $1675

After two month, As the contract price still decreases and becomes $1.07976/Euro , the contract holder suffers a loss as now the price of Euro is less than contracted.

Loss per Euro = $1.09 -$1.07976 =$0.01024

So, loss per 125000 Euro (One contract) = $1280

The new margin balance per contract = $3350 -$1280 = $2070

Total margin balance for two contracts = $2070 *2 = $4140

So, extra money is required to be put in equal to loss i.e. $1280 per contract

So for 2 contracts , total extra money is required to be put in = $1280*2 = $2560

After 3 months, as the rate is now $1.07888/Euro as against the contracted rate of $1.0967

Loss per Euro = $1.0967-1.07888=$0.01782

Total Loss for 250000 Euro = $4455 on the Futures contract