Question

A trader short sells four July futures contracts on frozen orange juice. Each contract is for...

A trader short sells four July futures contracts on frozen orange juice. Each contract is for the delivery of 10,000 pounds. The current futures price is 260 cents per pound, the initial margin is $5,000 per contract, and the maintenance margin is $4,000 per contract.
(a) What price change would lead to a margin call? (b) Under what circumstances could $4,000 be withdrawn from the margin account?
(b) Under what circumstances could $4,000 be withdrawn from the margin account?

Homework Answers

Answer #1

260 cents per pound is $2.6/Pound

a)

Margin Call will occur when margin balance falls below maintenance margin i.e. $4000 i.e. reduction of 5000-4000 = $1000

For a reduction of $1000, change in Price should be 1000/10000 = $0.1 i.e. More than 10 CENTS INCREASE in Price(i.e. Increase of 11 cents or more) would lead to a Margin Call.

b)

Maintenance Margin is the Margin that MUST be maintained. Therefore, to withdraw $4000, Total Balance should be 4000+Maintenance Margin i.e. 4000 = $8000.

For Balance to be $8000, there should be an increment(i.e. Profit) of $3000.

For a Profit of $3000, Price should fall by 3000/10000 = $0.3. Therefore, If Price FALLS by 30 CENTS, $4000 can be withdrawn.

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