Question

Problem 3:

An investor sold six contracts of June/2018 corn. The price per bushel was $1.62, and each contract was for 5000 bushels. The initial margin deposit is $3000 per contract with the maintenance margin at $2250.

The contract is sell contract, meaning it will gain if the price falls and lose if price increases.

The price per bushel is $1.62, so for 5000 bushels it will be 5000×1.64 = $8100 and for 6 contracts it will be 8100 × 6 = $48600

1. How much did the investor have to deposit on the investment?

The investor had to deposit ($3000 ×6)= $18000 on the investment since there are 6 contracts.

2. The prices of the futures on the four days following the short sales were 1.58, 1.60, 1.66, and 1.70. Calculate the current balance on each of the next four days.
3. If the investor closed out her position at the end of the fourth day, what was her final gain or loss over the four days in dollars and as a percentage of investment?
4. If the investor kept her position, and the futures price on the fifth day was 1.80, would the investor face a margin call? If yes, how much would she need to put up?

Answer 1

Maintenance Margin = Initial Margin Balance = 3000 x 6 = $ 18000

At the end of Day 1:

Price at the end of Day = $ 1.58

Day's Profit = (1.62 - 1.58) x 5000 x 6 = $ 1200

Final Margin Balance = 18000 + 1200 = $ 19200

At the end of Day 2:

Price at the end of Day = $ 1.6

Day's Profit = (1.58 - 1.6) x 5000 x 6 = - $ 600

Final Margin Balance = 19200 - 600 = $ 18600

At the end of Day 3:

Price at the end of Day = $ 1.66

Day's Profit = (1.60 - 1.66) x 5000 x 6 = - $ 1800

Final Margin Balance = 18600 - 1800 = $ 16800

At the end of Day 4:

Price at the end of Day = $ 1.7

Day's Profit = (1.66 - 1.7) x 5000 x 6 = - $ 1200

Final Margin Balance = 16800 - 1200 = $ 15600

Initial Investment Value = 1.62 x 5000 x 6 = $ 48600 and Final Investment Value = 1.7 x 5000 x 6 = $ 51000

Loss = (48600 - 51000) = - $ 2400

Loss % = (-2400 / 48600) x 100 = -4.938 %

At the end of Day 5:

Price at the end of Day = $ 1.8

Day's Profit = (1.7 - 1.8) x 5000 x 6 = - $ 3000

Final Margin Balance = 15400 - 3000 = $ 12400

Maintenance Margin = $ 2250 per contract, Total Maintenance Margin Required = 6 x 2250 = $ 13500

As the final margin balance is lower than the total required maintenance margin, the investor will receive a margin call. Margin Topup post margin call will require the account to be topped up to the initial margin value of $ 18000 ( and not just the maintenance margin amount)

Therefore, Required Margin Top Up = (18000 - 12400) = $ 5600