Question

Suppose the futures price is 1100 and you wish to acquire a $2.2 million position in the S&P index.
(i) How many futures contracts will you buy or sell, if the current value of one futures contract is $275,000?

(ii) Suppose that there is a10% margin in weekly settlement. How much will you lose if the S&P futures price drops by 1, to 1099?

(iii) Suppose that over the first week, the futures price drops 72.01 points to 1027.99. On a mark-to-market basis, how much will you lose?

Answer 1

Given data :

Future price = 1100; We wish to acquire a $2.2M in the S&P 500 index.

(I) The notional value of one contract is given as $275000.(The notional value of one contract is $250x1100 = $275,000)

Therefore, the number of contracts you will have to buy is $2.2M/0.275M=8.

Therefore, to go long you buy 8 futures contracts.

(ii) The margin on futures contracts with notional value of $2.2 million is $220,000. (10% of $2.2M = $220,000).

If the S&P 500 futures price drops by 1 point, we lose $2,000. Loss= (1199-1100)*(8x250) =-$2,000.

(iii) If it drops by 72.01 points to 1027.99, a decline of about 6.5% we lose : $144,020.