Question

Suppose that on March 1 you take a short position in a June crude oil futures contract at $20/barrel (contract size=1,000 barrels)

a. How much cash or risk-free securities would you have to deposit to satisfy an initial margin requirement of 5% of the contract value?

b. If the maintenance margin is 3% of the contract value. Calculate the values of your margin account on the following days and identify when you will receive the margin calls, given the following settlement prices: 3/2 $20.50 3/3 $20.75 3/4 $20.25 3/5 $19.50

Answer 1

Value of the crude oil contract = no of barrels * price per barrel = 1000 * 20 = 20000

a. Amount of cash we need to deposit as initial margin = 5% * 20000 = 1000

b) Maintenance margin = 3%*20000 = 600

3/2

Loss on contract = ( value of future - future price) * contract size = (20.50 - 20 ) *1000 = 500

margin account on 3/2 = 1000 - 500= 500

there will be margin call of 100 to make the margin account back to 600

3/3

Loss on contract = ( value of future - future price) * contract size = (20.75 - 20.50 ) *1000 = 250

margin account on 3/2 = 600 -250 = 350

there will be amrgin call of (600 - 350) ie 250 to meet maintenance margin requirement

3/4

Profit on contract = ( 20.75 - 20.25 ) *1000 = 500

Margin account = 600 + 500 = 1100

3/5

Profit on contract = ( 20.25 - 19.50 )* 1000 = 750

margin account = 1100 + 750 = 1850