Question

On CME group website, the September 2020 Corn future was quoted 433.75 (cents per bushel, 5000 bushels per contract) today and Springfield Mill (SM) took one long position to hedge against the price change of corn and will hold this future contract till maturity date. The initial margin requirement is 10% of notional value.

1) How much would SM deposit to the margin account at clearing house?

2) Suppose in June, the same corn future contract price is 450.25. Since profit or loss is “marking to market” by the clearing house, what would be the balance in the SM’s margin account? What is the percentage profit or loss?

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

4) If the maintenance margin requirement is 6%, at what price of the future contract would SM receive a margin call?

5) If the corn price on the September future maturity date is 440.35 cents per bushel, how much did SM profit or loss from the future contract? What is the return rate?

Answer 1

1]

Amount to deposit = contract purchase price * number of bushels per contract * initial margin %

Amount to deposit = $4.3375 * 5,000 * 10%

Amount to deposit = $2,168.75

2]

Balance in account = amount deposited + ((contract price in June - contract purchase price) * number of bushels per contract)

Balance in account = $2,168.75 + ((4.5025- $4.3375) * 5,000

Balance in account = $2,993.75

% profit = (Balance in account in june - initial amount deposited) / initial amount deposited

% profit = ($2,993.75 - $2,168.75) / $2,168.75

% profit = 38.04%

3]

To earn a 30% return on deposit, Balance in account in june = $2,168.75 * (1 + 30%) = $2,819.375

Let us say the future price is X. Then :

$2,819.375 = $2,168.75 + ((X- $4.3375) * 5,000

$2,819.375 = $2,168.75 + 5,000X - $21,687.50

5,000X = 22,338.125

X = $4.467625, or 446.7625 cents

4]

Price at which margin call is made = contract purchase price - ((contract purchase price * number of bushels per contract * (initial margin % - maintenance margin %)) /  number of bushels per contract)

Price at which margin call is made = $4.3375 - (($4.3375 * 5,000 * (10% - 6%)) /  5,000)

Price at which margin call is made = $4.1640, or 416.40 cents per bushel

5]

Balance in account = amount deposited + ((contract price in september - contract purchase price) * number of bushels per contract)

Balance in account = $2,168.75 + ((4.4035- $4.3375) * 5,000

Balance in account = $2,498.75

% profit = (Balance in account in september - initial amount deposited) / initial amount deposited

% profit = ($2,498.75 - $2,168.75) / $2,168.75

% profit = 15.22%