Question

Suppose the initial margin on heating oil futures is $8,500, the maintenance margin is $7,000 per contract, and you establish a long position of 16 contracts today, where each contract represents 42,000 gallons. Tomorrow, the contract settles down $0.08 from the previous day's price. What is the maximum price decline on the contract that you can sustain without getting a margin call? (A negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 3 decimal places.) Margin call cents per gallon

Answer 1

If the contract settles down, a long position loses money. The loss per contract is: 42,000 ×0.08= $3,360

So when the account is marked-to-market and settled at the end of the trading day, your balance is $5140 ($8,500 -3,360), which is less than the maintenance margin.

The minimum price change to sustain a margin call can be given by -

(initial margin) - Maintenance Margin = Size of contract * Price change

$8,500 - 7000 = 42,000 * X

X = 1,500/42,000 = $ 0.03571 = 3.571 cents