Question

The futures price of gold is $1,250. Futures contracts are for 100 ounces of gold, and the margin requirement is $5,000 a contract. The maintenance margin requirement is $1,500. You expect the price of gold to rise and enter into a contract to buy gold.

a)How much must you initially remit?

b)If the futures price of gold rises to $1,255, what is the profit and percentage return on your position?

c)If the futures price of gold declines to $1,248, what is the loss and percentage return on the position?

d)If the futures price falls to $1,238, what must you do?

e)If the futures price continues to decline to $1,210, how much do you have in your account?

f)How do you close your position?

Answer 1

a)	The amount to be remitted initially is the initial margin =	$            5,000
b)	Profit = 100*(1255-1250) =	$               500
	Return = 500/5000 =	10.00%
c)	Loss = 100*(1248-1250) =	$              -200
	Return = -200/5000 =	-4.00%
d)	Balance in the account if, price falls to 1238 = 5000-100*(1250-1238) =	$            3,800
	Nothing is to be done as the balance is above the maintenance margin
e)	Balance in the account if, price falls to 1210 = 5000-100*(1250-1210) =	$            1,000
	As the balance in the margin account is less than the maintenance margin, amount required to bring the balance to the initial margin of $5000 is to be deposited. Therefore, amount to be deposited = 5000-1000 =	$            4,000
f)	Position is closed by entering into the opposite transaction. That
	is by selling one futures contract.