Question

Suppose you short one futures contract of Brent Crude for August delivery and lock into F0...

Suppose you short one futures contract of Brent Crude for August delivery and lock into F0 = $28.00. Suppose the initial margin requirement for the oil contract is 12%. Let's now assume that the price of Brent Crude takes a steady decline over the course of your time horizon. Assume that at maturity, ST = $18.50.

b. Would you expect to have a margin call during your time horizon given the information above? Why or why not?

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Answer:

From the given data, no, I would not expect a margin call during this time period because there is a short one futures contract, hence, there is a reasonable assumption on the decline in proces.

It has also been mentioned that prices are steadily declining, therefore, the futures account will decrease in the future. Hence there is no expectation of a margin call.

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