Question

IFO Simulation Review By Duke @ Masterability Question 1 Part A: A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. (a) What price change would lead to a margin call? (5 points) (b) Under what circumstances can $2,000 be withdrawn from the margin account? (5 points) Part B: At the end of one day a clearing house member is long 100 contracts, and the settlement price is $50,000 per contract. The original margin is $2,000 per contract. On the following day the member becomes responsible for clearing an additional 20 long contracts, entered into at a price of $51,000 per contract. The settlement price at the end of this day is $50,200. How much does the member have to add to its margin account with the exchange clearing house? (10 points) stero binity ability

Answer 1

Solution- In the Given Question-

Trader taken two future contract, Initial Margin per Contract = $6,000, Maintainence Margin per contract = $4,500.

Current future price = 160 cents per pound, Each contract for delivery = $15,000.

A. There will be margin call if loss per contract is greater than the difference between Initial margin and Maintainence margin i.e. $1,500 ($6,000 - $4,500).

future delievery amount for each contract = 15000 * 160 cents = $24000. if we get loss of $1,500 then we have ($24000 - $1500) i.e. $22,500. Per contract is 15000 pound hence Reduced price is to 22500 / 15000 = $1.50 i.e. 150 cents.

This will be happen when the fututre price falls by more than 10 cents i.e. 150 cents per pound.

B. $2,000 will be withdrawn from the Margin amount when per contract gain is amounting to $1,000. If the Future price will rise by 6.67 cents i.e. 166.67 cents per pound then this will be happen.

Part B-

On entering in new contract Initial margin is required amounting to = $2000 * 20 contracts = $40,000.

On existing contract there is a gain of = ($50,200 - $50,000) * 100 = $20,000.

On new contract there is a loss of ($51,000 - $50,200) * 20 = $16,000.

The member is required to add in margin account amounting to = Initial Margin + Gain on new contract - Loss on existing contract

Margin Money Required = $40,000 + $16,000 - $20,000 = $36,000.

Member have to add to its margin account with exchange clearing house is $36,000.

If you have any query related to answer then please feel free to ask me in a comment. Thanks. if you agree with answer then please rate the answer.