Question

An investment banker believes that the dollar will appreciate relative to the euro over the next few days. The banker decides to use two euro futures contracts to trade based on her belief. Each contract has 150,000 euros attached. The initial and maintenance margin is $15,000 and $10,000 per contract, respectively. The futures price on the day the banker opened her position (Tuesday) was $1.625.
The futures price on Wednesday is $1.605. Find the banker's ending margin balance on Wednesday. (Assume any deficits are eliminated to keep the account open and any excess funds remain in the account)

The futures price on Thursday is $1.665. Find the banker's ending margin balance (in USD) on Thursday. Assume any deficits are eliminated to keep the account open and any excess funds remain in the account. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

The futures price on Friday is $1.615. Find the banker's ending margin balance (in USD) on Friday. Assume any deficits are eliminated to keep the account open and any excess funds remain in the account. Round intermediate steps to four decimals and your final answer to two decimals. Do not use currency symbols or words when entering your response.

Answer 1

As the dollar appreciates against the euro, the euro depreciates against the dollar. This implies, that the value of the euro is expected to go down with time. Therefore, the speculator (investment banker in this case) will go short (sell) on the two futures contract each worth 150000 euros (as the speculator will benefit from a fall in the euros value only if he/she is short on the same)

Initial Margin = $ 15000 and Maintenance Margin = $ 10000

At the end of Wednesday:

Initial Exchange Rare = $ 1.625

Ending Exchange Rate = $ 1,605

Profit Generated = 150000 x 2 x (1.625 - 1.605) = $ 6000

Ending Margin Balance = 15000 + 6000 = $ 21000

At the end of Thursday:

Initial Exchange Rare = $ 1.605

Ending Exchange Rate = $ 1,665

Profit Generated = 150000 x 2 x (1.605 - 1.665) = - $ 18000

Ending Margin Balance = 21000 - 18000 = $ 3000

A margin call will be trigerred here as the maintenance margin balance of $ 10000 is breached. In this case the account deficit will be topped up all the way to the initial margin level of $ 15000

At the end of Friday:

Initial Exchange Rare = $ 1.665

Ending Exchange Rate = $ 1,615

Profit Generated = 150000 x 2 x (1.665 - 1.615) = $ 15000

Ending Margin Balance = 15000 + 15000 = $ 30000