Question

A company enters into 4 long futures contract each with a size of 20,000 units of a commodity for 150 cents per unit. The initial margin is $10,000 and the maintenance margin is $8,000, both on a per contract basis. Consider the following statements.

I. The futures price below which a margin call will occur is $1.4000.

II. The futures price above which $10,000 can be withdrawn from the account is $1.6000. Which of the following is correct?

a. Statement I is correct, Statement II is correct.

b. Statement I is incorrect, Statement II is correct.

c. Statement I is correct, Statement II is incorrect.

Answer 1

The maintenance margin is 8000$ and current available margin is 10000. This means that if the loss goes above $ 2000, there will be a margin call.

1. If the price goes below $1.4, it implies there is loss of $0.1 per unit. For 20,000 units, the loss will be 20000*0.1 = $ 2000.

Hence the margin would reduce to $ 8000. If price goes below $ 1.4000 there will be a margin call.

2. When price is $ 1.6000, implies there is profit of $0.1 per unit and for 20,000 units profit is $ 2000. The available margin would increase from 10,000 to $ 12,000.

From this $ 12,000, $8000 is maintenance margin. Hence the remaining margin is only $4000.

Hence $10000 cannot be withdrawn if price is $1.6

Statement I is correct and II is incorrent.

Correct option is option c