Let us pretend that today was in Oct. 2019. The crude oil
futures contract would mature one year later, Oct. 2020;
Each contract consists of 1,000 barrels, with "Multiplier" = 1000.00;
Each contract requires $4,180.00 as the initial margin for traders to long (ie., "buy on margin") or short, with "Margin" = 4180.00;
No matter you long or short this commodity today, assume that the price can be settled at $50.68 per barrel, with "Last Price" = 50.68;
Your specific brokerage firm will decide the interest rate for cash. Currently the borrowing rate is assumed to be APR = 2.5% per year, while the deposit rate is negligible (APR=0%).
And crude oil, of course, pays no interest or dividend at all.
You predict crude oil price will rise within the year, and thus
invest $4,180 today as margin to buy one contract of 1000 barrels
@$50.68 per barrel.
In other words, you invest $4,180 of your own money today as margin to buy one contract of 1,000 barrels @$50.68 per barrel.
One year later, if the crude oil price rises to $60.00 per barrel and the interest expense on borrowed cash becomes due, what shall be the % rate of return on your oil investment?
Your friend Leo predicts crude oil price will drop within the year, and thus invests $4,180 today as margin to short one contract of 1000 barrels @$50.68 per barrel.
In other words, Leo invests $4,180 of his own money today, and borrows 1,000 barrels of crude oil from the brokerage to sell for $50.68 per barrel.
One year later, if the crude oil price rises to $60.00 per barrel (but the borrowed oil will have no interest or dividend to be due), what shall be the % rate of return on Leo's oil investment?
The brokerage firm requires all buyers and sellers must keep the maintenance margin to be at least 2% of the traded commodity value.
In other words, traders' equity amount must be no less than 2% of the market value of 1,000 barrels of oil, otherwise they will receive margin call (to urge for more money or to foreclose account).
What price amount of oil will begin to trigger a margin call to you? And what price amount of oil will begin to trigger a margin call to Leo?
Please note that a margin call could happen anytime soon, even long before the interest on borrowed cash becomes due.
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