Question

2. A trader takes a long position and a hedge fund takes a short position on ten S&P 500 futures contracts at 3300. A single S&P 500 futures contract invoice price equals ($50) x (Index Price). The initial margin is $12,500 and the maintenance margin is $9,500 per contract. Ten trading days later, the futures price of the index drops to 3150. a) What is the change in margin account balance 1) for the trader, and 2) for the hedge fund (indicate gain or loss)? b) Is there a margin call for one of the two parties? c) What is the maximum change in the S&P futures price which will lead to no margin call for either party?

Answer 1

2. Change in Margin account balance of th two parties

= change in price * lot size * no. of contracts

= (3300-3150) * 50 * 10

=$75000

or $7500 per contract

As the index has fallen from 3300 to 3150 in the ten days, the margin account of trader will suffer a loss and that of the hedge fund will have a gain for the same amount

a) So, Change in margin account balance of the trader = $75000 loss

Change in margin account balance of the Hedge fund = $75000 profit

The new balance of trader =Initial balance -loss = $12500 *10 - $75000 =$50000 or $5000 per contract

The new balance of hedge fund =Initial balance + profit = $12500 *10 + $75000 =$200000 or $20000 per contract

b) As the maintenance margin is $9500 per contract, and the margin account of trader has a balance of only $5000 per contract which is less than the maintenance margin, the trader will get a margin call. There will be no margin call for hedge fund as the margin account balance is more than the maintenance margin

c) The maximum change in S&P for no margin call corresponds to the difference between initial margin and maintenance margin

Difference between initial margin and maintenance margin = $12500-$9500 = $3000 per contract

So, maximum price change * lot size = $3000

=> maximum price Change * $50 = $3000

=> maximum price change = $60

So, if the price chage in the Index is less than $60 ie.. price is between 3240 and 3360 , there shall be no margin call for either of the parties