Question

Exercise on understanding the flow of Margin Let's say two speculators-one bullish and one bearish- elect to take opposite positions in March crude oil at $77 per barrel. Both maintain accounts at brokerages that allow them to trade on exchange minimum margins. Both would be required to put up the $4725 performance bond to open their positions. Traders are aware that the exchange also set $3500 as the maintenance requirement for their contracts. That means that up to $1225 ($4725-$3500) in losses could be sustained before a maintenance call is issued. This translates into price change of $1.22 per barrel, as minimum lot is 1000 barrels. Any adverse price movement in excess of $1.22 per barrel will put one of into margin call territory. Activity: Calculate what happens if March crude oil rises to $78.36.

Answer 1

Suppose that both the speculators speculated on 1 lot i.e., 1000 barrels of crude oil.

Given current price as $ 77 per barrel of crude oil.

For Bullish speculator

He would have provided $ 4725 as performance margin to the broker.

If the price rises to $ 78.36 per barrel, the profit of $ 1.36 per barrel which amounts to $ 1360 per lot (1.36*1000) will be added up to his margin.

For Bearish speculator

He would have provided $ 4725 as performance margin to the broker.

If the price rises to $ 78.36 per barrel, the loss of $ 1.36 per barrel which amounts to $ 1360 per lot (1.36*1000) will be adjusted against the margin. Then the margin stands at $ 3365 (4725-1360) which is less than the maintenance margin $ 3500 required for the contract.

As the margin falls below the minimum margin requirement, the broker makes a call for $ 1360 to make the margin to the level of Performance margin.