Question

Each contract is worth = €125,000 and the Margin = your equity position, while the Initial Margin = the amount of money you must put into an account to open the futures position. This is still your money as you have not “bought” the contract, instead the margin amount is your escrow (or good faith) money to assure you will be able to pay for a loss to you in the contract. The Maintenance Margin = The minimum amount allowed in your margin account. Below that amount the futures position may be closed if you do not add funds to your account. Finally, the Margin Call = When your account reaches the Maintenance level and the futures broker “calls” you asking for more money.

1. You want to enter 3 March contracts to buy euros at $1.17. The Initial Margin requirement is 3% and the Maintenance requirement is 30% of Initial Margin requirement.
a. What is the Initial Margin dollar amount?
b. At what margin amount will you receive a margin call?
c. At what exchange rate will you receive a margin call?
d. If the exchange rate goes to $1.14/€1 what will be the gain or loss on your futures contracts?
e. If the exchange rate goes to $1.22/€1 what will be the gain or loss on your futures contracts?

Answer 1

a]

Initial Margin dollar amount = contract purchase price * contract size * number of contracts * Initial Margin %

Initial Margin dollar amount = $1.17 * 125,000 * 3 * 3%

Initial Margin dollar amount = $13,162.50

b]

Margin amount at which you will receive a margin call = Initial Margin dollar amount * 30%

Margin amount at which you will receive a margin call = $13,162.50 * 30%

Margin amount at which you will receive a margin call = $3,948.75

c]

Rate change that would lead to margin call = (initial margin - maintenance margin) / (contract size * number of contracts)

Rate change that would lead to margin call = ($13,162.50 - $3,948.75) / (125,000 * 3)

Rate change that would lead to margin call = $0.02457

Exchange rate at which you will receive a margin call = contract purchase price - Rate change that would lead to margin call

Exchange rate at which you will receive a margin call = $1.17 - $0.02457

Exchange rate at which you will receive a margin call = $1.14543

d]

Loss = (contract purchase price - ending contract price) * contract size * number of contracts

Loss = ($1.17 - $1.14) * 125,000 * 3

Loss = $11,250

e]

Profit = (ending contract price - contract purchase price) * contract size * number of contracts

Profit = ($1.22 - $1.17) * 125,000 * 3

Profit = $18,750