Question

The T-Bond future with maturity date March 2021 was quoted 113.25 (% of face value, 100 bonds per contract) today on Chicago Board of Trade (CBT). The margin requirements from the clearinghouse are: initial margin 11%; maintenance margin 5%. Bank of America just took a short position on this future contract at the price.

1) What is the initial deposit for the long position? If the future price is 114.75 in May 2020, what would be the balance of Bank of America’s margin account?

2) If future price is 109.75 in May 2020, what is the return rate on Bank of America’s initial deposit?

3) At what future price would Bank of America get a margin call?

Answer 1

Let us assume the face value fo the bond is $100.

Price of the bond 113.25% of face value i.e.. $100*113.25% = $113.25

Price of the bond contract would be = 100*$113.25 = $11,325

Maintenance margin is 5% = $11,325 *  5% = 566.25

1) Initial margin would be $11,325*11% (initial margin) = $1,245.75

if the future price jumps to $114.75 then balance in margin account would be 5% * ($114.75*100) = $573.75

2) if the price of the bond drops to $109.75, return rate would be ($113.25 - $109.75) =$3.5*100 bonds=

Return rate is = $350 / $11,325 = 3.09%

3) Margin call price would be = Initial price * (1- initial margin) / (1 - maintenance margin)

=$11,325 * (1-11%) / (1-5%) = $11,325 * (0.89/0.95)

= $10,610