Question

Suppose you short one futures contract of Brent Crude for August delivery and lock into F0 = $28.00. Suppose the initial margin requirement for the oil contract is 12%. Let's now assume that the price of Brent Crude takes a steady decline over the course of your time horizon. Assume that at maturity, ST = $18.50. a What is your overall profit in dollars and in percentage terms at delivery (reflecting the leverage inherent in your transaction)?

Answer 1

One futures contract size = 1000 barrels

You short the contract meaning you will sell at $28 at delivery date. Initial margin is your investment. Assuming price is per barrel -

Overall profit = ($28 - $18.5) x 1000 = $9,500

Initial margin = 12% x $28 x 1000 = $3,360

Profit in percentage terms = $9,500 / $3,360 = 2.827381 or 282.74%