Question

A company enters into a short future contract to sell 5,000 bushels of wheat for 450 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 Under what circumstances could $1,500 be withdrawn from the margin account? Please show work.

Answer 1

Since maintenance margin is 2000, and initial margin is 3000, there will be a margin call when 1000 is lost on the contract

price of future contract , p0= 450 cents per bushel or 450*5000 cents = 2,250,000 cents or $22500

let the new price of the wheat future at which the margin call will happen be p1

total loss = $1000

p1- p0 = 1000

p1 = 22500 + 1000 = 23500

price per bushel = p1/5000 = 23500/5000 = $4.7 or 470 cents

hence a price increase of an amount = 470 - 450 = 20 cents will lead to a margin call

let the price at which there will be a loss of $1500 be p2

p2 - p0 = 1500

p2 - 22500 = 1500

p2 = 1500+22500 = 24000

price per bushel = p2/5000 = 24000/5000 = $4.8 or 480 cents

thus a price increase = 480-450 = 30 cents will lead to $1500 withdrawn from margin account