Question

Suppose you enter into a futures contract to buy 10,000 bushels of corn at 10 cents per bushel a month from now. The exchange requires you to put in a margin of $2,000. The price of corn falls to 8 cents per bushel that same day. How much will you have left in your margin account at the beginning of the following day?

Answer 1

Answer :

The dollar value of price fall for each contract = No. of Bushels in each contract * Initial price of each Bushel * Fall in price

Here, it is given in the question that

No. of Bushels in each contract = 10,000

Initial price of each Bushels = 10 cents (or) $0.10

Fall in price = 8% (or) 0.08

Now,

The dollar value of price fall for each contract = 10,000 * 0.10 * 0.08 = 80

Therefore,

Amount left in margin account = Initial margin - Loss ( Fall in dollar value of price in each contract )

= 2,000 - 80

Amount left in margin account = $1,920