Question

In: Finance

Suppose you open a trading account with Black Hills Brokerage. Considering the producing of shale gas...

Suppose you open a trading account with Black Hills Brokerage. Considering the producing of shale gas in U.S. you believe gasoline prices will decrease, and you establish a short position of 15 gasoline futures contract. Your initial margin to establish the position is $7,425 per contract and the maintenance margin is $6,500 per contract. Assume that a margin call requires you to fund your account back to the initial margin requirement.

1. How much margin you should put up for your futures trading account? What is the initial value of your position?
1. Over the subsequent four trading days, gasoline settles at $2.071, $2.099, $2.118, and $2.146, respectively. Compute the balance in your margin account at the end of each of the four trading days. What happen to your margin account?
1. Compute your total profit or loss at the end of the trading period.
1. What is your percentage return?

Expert Solution

Answer a ) since the number of contracts is 15 and the margin per contract is $7425 so the total margin required to open the trading account is $7425*15 = $111375

The initial value of the position is Zero , any futures contract has an initial value of 0

B) assuming the typical 40% initial margin the initial contract price will be calculated as below

since 40% is $111375

then 100% will be =$111375/40%

= $278437.5

So the initial Price of the contract is $278437.5

now future contract are traded at 1000 barrels per contract and since value of one 15 contract is 278437.5

Value of one contract will be 18562.5

so price per barrel is 1.856

Day	Gasoline price	Margin	Margin call(below 6500)	Total margin	Value of position	Balance in margin AC
0	1.856	7425		7425	0	111375
1	2.071	5275	2150	7425	-2150	79125
2	2.099	7145	280	7425	-280	107175
3	2.118	7235	190	7425	-190	108525
4	2.146	7145	280	7425	-280	107175

C) initial price at which we enter the contract was 1.856 / barrel and one contract is 10000 barrel then it is $18562.5 per contract

now the price rise to 2.146 per barrel pr $21460 per contract so loss per contract is $2897.5 and total loss is $43462.5

initial investment was $111375

sp return % is loss 43462.5/111375 = - 39%

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