Question

AutoSave OFF DA S U w margins_example-2 Q Search in Document Home Insert Draw Design Layout References Mailings Review View Share Comments Times New... 12A A Aa AO Ev B I Uab X, X? APA E SE All D AaBbCcDdE AaBbCcDdE AaBbCcDc AaBb CcDdEt AaBb No Spacing Heading 1 Heading 2 Title O AaBb CcDdEt AaBbCcDdEt AaBbCcDdE Subtitle S ubtle Emph. Emphasis Paste Normal Styles Pane Setup You are a manager of a grain elevator. You buy 10,000 bushels of corn from a local farmer. To hedge the price, you turn around and sell 2 contracts of December corn futures at $6/bushel (what turns out to be the settlement price for the day). Each contract is for 5,000 bushels, so you have purchased 10,000 bushels worth of futures. The initial margin for one contract is $2,700. The maintenance margin level for one contract is $2,000 per contract. Day 1 Corn prices decline 10 cents/bushel. [i.e. the settlement price for the day is 10 cents lower than yesterday's settlement price] a. What is the current price of corn futures? b. What is the notional value of your position now? c. You've sold 2 futures contracts. If you were to buy your futures contracts back now (and so offset your position), how much would you have made? (Hint: compare notional value when you bought it to notional value now). This is the amount of money that gets put in your margin account. This process is called marking to market. In marking to market, the exchange calculates each day how much someone would have made/lost if they offset their position right then. These gains or losses are then added to the margin account. d. How much is now in your margin account? Page 1 of 3 437 words English (United States) Focus E B = - - + 160%

Answer 1

a]

current price = last settlement price - decline in price

current price = $6 - $5.90 = $0.10

b]

Notional value of position now = current price * number of contracts * bushels per contract

Notional value of position now = $5.90 * 2 * 5,000

Notional value of position now = $59,000

c]

Notional value of position when contract was bought = contract purchase price * number of contracts * bushels per contract

Notional value of position when contract was bought = $6 * 2 * 5,000

Notional value of position when contract was bought = $60,000

Profit = Notional value of position when contract was bought - Notional value of position now

Profit = $60,000 - $59,000

Profit = $1,000

d]

Amount in margin account now = total initial margin deposited + profit

total initial margin deposited = initial margin per contract * number of contracts

total initial margin deposited = $2,700 * 2 = $5,400

Amount in margin account now = $5,400 + $1,000

Amount in margin account now = $6,400