4.27.2005

Q&A: When will an investor receive a margin call...

...if he holds a long position in 10 oat futures contracts, with a required initial margin of $5 per contract, a maintenance margin of $2, and the following end-of-the-day prices?

Day 0 Day 1 Day 2
$100 $101 $96

A

  • initial margin = $5 * 10, Maintenance margin = $2 * 10
  • Day 1: Margin balance = $50 + (101-100) * 10
  • Day 2: $60 + (96 - 101) x 10 = $10. Since the margin balance is below the maintenance margin, he receives a margin call: must restore his balance up to the initial margin. Variation margin = initial margin - margin balance = 50 - 10 = $40.

Bonus Points

  • A long futures position suffers losses when futures prices fall.
  • Will get the call when 5-2 = 100-x, solve for x = $97.

Category: C++ Quant > Derivatives

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