Question

this is related to the previous question that i posted

F) Compute the amount in balance in your margin account at end of day 3 and explain the components making up this amount. (5 marks)

Answer 1

A wheat contract consist of 5000 bushels and each bushel cost today $2.Each contrat require initial margin of $150 and a maintenance margin of $ 100.

Initial margin for 3 contract =150*3 i.e. $450

Maintenance Margin for 3 Contract =100*3 i.e. $300

PT c Price per bushel has gone down by two cents (0.02 US dollars) in the first day of trading

Since price has gone down by 0.02 US Dollars and we are long on contract so we incur loss due to decrease in price and have to pay the amount from the margin money.

Loss =5000 bushels * $ 0.02 i.e. $ 100

Balance in margin money after payment =$150-$100 i.e. $50

Amount to be paid to restore maintenance margin = $100-$50 i.e. $50 per contract

Total amount to be paid =50*3 i.e.$150

PT d

By the end of day 2, the price per bushel has gone up by three cents (0.03 US dollars) compared to day1

Since price has gone up by 0.03 US Dollars and we are long on contract so we earn profit due to increase in price and will recieve the amount in the margin money.

Profit = 5000 bushels * $ 0.03 i.e. $150

Balance in margin money after receiving the amount = $ 100 +$150 i.e. $250

Sine amount is more then maintenance margin so no payment to be made for margin money.

Pt e

By the end of day 3, the price per bushel has gone down by one cent (0.01 US dollars) since day 2

Since price has gone down by 0.01 US Dollars and we are long on contract so we incur loss due to decrease in price and have to pay the amount from the margin money.

Loss =5000 bushels * $ 0.01 i.e. $ 50

Balance in margin money after making payment = $250- $50 i.e. $200

Sine amount is more then maintenance margin so no payment to be made for margin money.

Cumulative profit/ Loss = Price at the end of day 3 - Price at the beginning

= $ 2- $2 i.e. 0( No profit /No Loss)

Price at the end of day 3 = $(2-0.02+0.03-0.01) i.e. $2

PT f

Balance in margin money after making payment = $250- $50 i.e. $200

Initial margin is the margin which is required at the time of entering into contract.

Maintenance margin is the amount which must be maintained in margin account during the period of Contract.If margin fall below the maintenance margin then fresh amount to be paid in the margin balance.