Question

One contract is €125,000. You want to enter 2 March contracts to buy euros at $1.15. The Initial Margin requirement is 3% and the Maintenance requirement is 30% of Initial Margin requirement.

a. What is the Initial Margin dollar amount?

b. At what margin amount will you receive a margin call?

c. At what exchange rate will you receive a margin call?

Answer 1

one contract is for euro 125,000. Since, we want to buy 2 contracts the total amount is = euros 250,000

a. The initial margin dollar amount is = 0.03 * 250,000 *1.15

=$8625

b. The maintenance margin is = 30% * $8625

= $2587.5

I will receive a margin call if the value of the contract falls by ( $8625 - $2587.5 = $6037.5), as the value of the contract cannot fall below $2587.5.

c. $6037.5/$2,50,000 = 0.0242

i will receive a margin call , when the exchange rate falls to $1.1258 (1.15 - 0.0242 = $1.1258). In such cases we have to fund the account sufficient to bring the balance back to $8,625.