Question

ABC Company Ltd purchased 5000 cocoa futures contract at a price of $150 per contract. As part of the contract, ABC was required to deposit $10 per contract initially in their account with the maintenance margin set at $5 per contract. If the price per contract falls to $142 overnight, what action will the exchange require ABC to undertake?

Answer 1

Ans ) Future contracts are the derivative instruments that comes into existence when the buyer of the contract agreed to by the contract at some future date and with a predetermined price.Here both the buyers and sellers have the obligation to buy and sell the underlying asset on the contract at a predetermined time and price.In the above question ABC purchased a future contract to buy 5000 cocoa future contract at a price of $ 150.The initial deposits and maintenence margin are $ 10 and $ 5 respectively. If the price of Cocoa drops to $ 142 than ABC will not exercise the contract but has to pay as 10+5 = $15 per contract as compensation which is 15*5000 = $ 75000 to the exchange.