In: Finance
Your broker requires an initial margin of $4,500 per futures contract on soybeans and a maintenance margin of $3,000 per contract. Each soybean futures contracts are based on 5,000 bushels and quoted in cents per bushel. Yesterday, you bought 5 soybean futures contracts at the closing settlement price of 1372 (i.e., $13.72). Today, the settlement quote is 1340. All margin calls restore margin levels to their initial margin level.
A Will you receive a margin call and if so, for what amount to deposit for the 5 contracts?
B If today's settlement quote is 1340, the current dollar amount of equity (margin) per contract before any possible margin call is closest to?
C When the 5 contracts were purchased, the total dollar amount of required equity was closest to
D he decrease in value per contract is closest to
You buy a futures contract means you are long on futures contract
Futures pay-off per contract = (Closing price - purchase price) * 5000
where 5000 is the no. of bushels in 1 contract
A) Futures pay-off per contract = ($13.4 - $13.72) * 5000 = -$1600
Margin left in account per contract = initial margin + future pay-off = $4500 + (-$1600) = $2900
Since $2900 is less than $3000 (maintenance margin), you will receive a margin call
Margin to be paid for 1 future contract = $4500 - $2900 = $1600
Margin to be paid for 5 future contracts = $1600*5 = $8000
(B) Let S be the price before margin call
Futures pay-off per contract = (X - $13.72) * 5000 (since X <13.72, this value is negative, so we will take negative of it when balancing with loss)
Maximum amount that can be lost before margin call = initial margin - maintainance margin = $4500 - $3000 = $1500
1500 = -(X - 13.72) * 5000
X = $13.42 (PRICE below which margin call is given)
C) When we enter into a future contract we do not have to pay anything for the future contract. But we have to maintain a margin account with the broker
Initial Margin to be deposited = $4500/contract * 5contracts = $22500
(D) decrease in value per contract is closest = $1600 (calculated in part A)