Question

A company enters into a long futures contract to buy 5,000 bushels of wheat for 250 cents per bushel. The initial margin is $3,000 and the maintenance margin is $2,000. What price change would lead to a margin call? Under what circumstances could $1,500 be withdrawn from the margin account?

Answer 1

margin call will be made when reduction in price would lead the margin money to fall upto $1000 so as to reduce the initial margin to $2000 i.e equal to maintenance margin. Thus fall of $1000 i. e per bushel $1000/5000 *100 cents = 20 cents. thus if price falls below 250-20 cents = 230 cents.. margin call will be received.

$1500 /5000 bushels *100 cents =30cents i.e 250+30 =280 cents . Thus, if price of each bushel becomes 280cents & above then 1500$ can be withdrawn.