Question

One orange juice futures contract is on 15 000 pounds of frozen concentrate. The current price is 1.1505 $/pound and the risk-free continuously compounded interest rate is 2% per year. You know that the storage cost amounts to 1.5% per year and the convenience yield is 2.4% per year (both cont. comp.). You enter into a short position on 100 contracts for delivery in 1.5 years. The initial margin is set at $40 000 so you deposit this amount into your account. One year later, you get your first margin call because the value of your account has dropped below $15 000. What change in the spot price of orange juice concentrate caused this margin call?

Answer 1

Value of One Orange Juice Future Contract (Pounds) = 15,000 Pounds

Value of One Orange Juice Future Contract (Dollars) = 17,257.50 Dollars

Number of Future Contracts Purchased = 100 Contracts

Total Initial Margin = 40,000 Dollars

Margin in percentage = 40,000 / (17257.50 x 100)

= 2.3178%

Value of account after Year = ( - ) 15000 Dollars

Total margin at that Date = 40,000 + 15,000 = 55,000 Dollars

Value of Future Contracts = 55,000 / 2.3178%

= 2,372,940 or 23,729.40 dollars per Contract

Hence Increase in Price = (23,729.40 - 17257.50) / 17257.50 = 37.50 %