Question

# One orange juice futures contract is on 15 000 pounds of frozen concentrate. The current price...

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?

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 %

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