Question

Assume today’s settlement price on a Chicago Mercantile Exchange EUR (euro) futures contract is $.0564/MXN. You BUY a futures contract to hedge an exposure to MXN10,000,000 payable. Your initial margin account balance is $15,000. The next three days’ settlement prices are $.0566/MXN, $.0563/MXN, and $.0561/MXN. Calculate the changes in the margin account (and the new balances) from daily marking-to-market adjustments over the next three days. The contract size is 10,000,000 Mexican Pesos.

ANS:      DAY 0                                                 MB = $15,000

              

DAY 1    ∆ = _________                  MB = $__________

              

DAY 2    ∆ = _________                  MB = $__________

              

DAY 3    ∆ = _________                  MB = $__________

              

Answer 1

Given Initial margin account balance(MB) =$15000

Contract size is 10,000,000

Day	Settlement price
0	$.0564/MXN
1	$.0566/MXN
2	$.0563/MXN
3	$.0561/MXN

Day 1 = ($.0566 - $.0564) *10,000,000 = $.0002* 10,000,000 =$2000

Day 2 = ($.0563 - $.0566) * 10,000,000 = -$.0003*10,000,000 = -$3000

Day 3 = ($.0561 - $.0563) * 10,000,000 = -$.0002*10,000,000 = -$2000

Initial MB = $15000

Add gain = $ 2000

Day 1 MB = $17000

Less loss= $ 3000

Day 2 MB = $14000

Less loss = $ 2000

Day 3 MB = $12000

(Explanation: Since the price has been increased from day 0 to day1 , such difference has been added to initial margin.

since the price has been decreased from day 1 to day 2 and from day 2 to day 3, such differences has been subtracted.