Question

2. Shell Co. took a short position on Dec 2020 Gasoline future at a price of 2.99 ($ per gallon, and 42,000 gallons per contract) and will hold the future contract till maturity date. The initial margin requirement is 14% of notional value.

a) How much would Shell deposit to the margin account at clearing house?

b) Suppose in Sept, the same future contract is quoted 2.78. Based on marking to market, what would be the margin account balance for Shell? How much is the percentage profit or loss?

c) At what future price will Shell earn a 30% return rate on the deposit?

d) If the maintenance margin requirement is 5%, at what price of the future contract would Shell receive a margin call?

e) If the gasoline price on the December future maturity date is $3.19/gallon, how much did Shell profit or loss from the future contract? What is the return rate?

Answer 1

a) A shell co. has to deposit $17581.20 as an initial margin to the margin account at the clearinghouse.

$2.99*42000 = $125580 , initial margin is 14% of the contract value so, amount required (125580*0.14 = $17581.20)

b) If the same contract is quoted  $2.78 in September then MTM will be the price difference between the same contract (2.99*42000 = $125580) - (2.78*42000= $116760) = $8820. so, there would be an opportunity loss of $8820 as the same contract can be short at a low price of $2.78 per gallon in September compared to the current short price of $2.99 per gallon.

c) As the contract is in a short position so we earn the profit when the price of the oil will goes down. So, to earn a profit of 30% the stock price should befall to 30% of the CMP of $2.99 which is $2.90.

2.99*42000 = 125580

2.90*42000 = 121800

We are in short position and we make profit when price fall hence, 125580 - 121800 = 3780 is the profit

d) The maintenance margin is 5% so, the cell will receive a call when the initial margin will drop from  $17581.20 to $6279. which is 5% of the contract value.

e) If the gasoline price on the dec future maturity date is $3.19/gallon then the Shell Co. has made a loss of $0.2/gallon which cost to an overall loss of $8400

($0.20*42000 = $8400).