Question

The September 2020 coffee future was quoted 1.20 ($ per lb, with 37,500 lbs per contract) today on Chicago Mercantile Exchange (CME). The margin requirements from the clearinghouse are: initial margin 15%; maintenance margin 7%. Maxwell House just took a long position on this future contract at the price.

1) What is the initial deposit for the long position? If the future price is 1.38 at the end of May 2020, what would be the balance of Maxwell House’s margin account? (5 points)

2) For the same future contract, at what future price would Maxwell House get a margin call? (5 points)

3) If Maxwell holds the long position till September maturity date and the price of coffee is $1.35 per lb on that day, what is the total profit/loss of Maxwell House from the future contract? (5 points)

Answer 1

Contract Value = 37500 * 1.2 = 45000

Initial Margin = 45000 * 0.15 = 6750

Maintainance Margin = 3150

a) Inital deposit for the long position = initial margin = 6750

If future price = 1.38

MTM profit = (1.38-1.2)*37500 = 6750

this MTM profit will be added to maintainance margin of 6750

Balance of margin account = initial margin + MTM profit = 6750 + 6750 = 13500

b) if margin balance fall to maintainance margin of 3150 there will be a margin call

ie there should be a MTM loss of (initial margin - maintainance margin) 6750-3150 =3600

fot MTM loss of 3600 coffee futures should fall by 3600/45000 = 8%

price of coffee future for margin call = 1.2 - 8% of 1.2 = 1.2 - 0.096 = 1.104

c) Profit = (Price at expity - initial price) x lot size

Profit = (1.35 - 1.2)*37500 = $ 5625