Question

Suppose that an investor enters into a futures contract to buy silver for $16.80 per ounce. The size of the contract is 5,000 ounces. The initial margin is $3,000, and the maintenance margin is $1,000. Regarding a futures price that the investor will receive a margin call and the additional amount of money that the investor needs to deposit, which of the following statements is the most accurate?

Select one:

a. A futures price of $16.40; the additional amount of $2,000

b. A futures price of $17.20; the additional amount of $3,000

c. A futures price of $17.20; the additional amount of $2,000

d. A futures price of $16.40; the additional amount of $3,000

Answer 1

As you are long in futures contract, you will have to pay additional amount if price comes down

If price comes down to 16.40,

the loss on futures contract = (16.80-16.40) x 5000 = 2000

As initial margin was 3000, and now loss = 2000, we have reached to maintenance margin = 3000 -2000 = 1000

so we have to pay additional 2000 to reach at initial margin of 3000

As said earlier, if price goes up, there is a profit on contract and no chance of margin call, so correct answer = a

Answer : a : A futures price of $16.40; the additional amount of $2,000