Question

I need the answers of the two questions to be explained to in clear step by step and understandable way please I prefer it to be using excel

1. Assume today's settlement price on a CME EUR futures contract is $1.3140/EUR. You have a short position in one contract. Your performance bond account currently has a balance of $1,700. The next three days' settlement prices are $1.3126, $1.3133, and $1.3049. Calculate the changes in the performance bond account from daily marking-to-market and the balance of the performance bond account after the third day. Solution: $1,700 ($1.3140-$1.3126) ($1.3126-$1.3133) +($1.3133-$1.3049)] xEUR125,000 $2,837.50, where EUR125,000 is the contract size of one EUR contract. 2. Do problem 1 again assuming you have a long position in the futures contract. Solution: $1,700($1.3126 $1.3140)($1.3133 $1.3126)($1.3049 $1.3133)]x EUR125,000 $562.50, where EUR125,000 is the contract size of one EUR contract With only $562.50 in your performance bond account, you would experience a margin call requesting that additional funds be added to your performance bond account to bring the balance back up to the initial performance bond level.

Answer 1

1. short position
When we have a short position, we are going to make a payment in USD in the contract and accepting in EUR.
A decrease in spot USD/EUR rates will mean we have to pay less USD to receive the same EUR.
Performance bond account reflects the net gain/loss of out position on a daily basis regarding how our exposure to rates move.
If and when it reached 0, it will need to be refilled to ensure that the contract still holds.
When the rates decrease on a short position, the account will reflect the net gain in position and vice versa.
Hence, on day one when rates move from 1.314 to 1.3126, the net position gain is (1.314-1.3126)x 125,000=$175

2. long position
When we have a long position, we are going to recieve a payment in USD in the contract and selling in EUR.
A decrease in spot USD/EUR rates will mean we have to receive less USD to receive the same EUR.
Performance bond account reflects the net gain/loss of out position on a daily basis regarding how our exposure to rates move.
If and when it reached 0, it will need to be refilled to ensure that the contract still holds.
When the rates decrease on a long position, the account will reflect the net loss in position and vice versa.
Hence, on day one when rates move from 1.314 to 1.3126, the net position loss is (1.314-1.3126)x 125,000=$175

Please see the attached excel snapshot for more clarity.