Question

A grain elevator operator bought a futures contract for 5,000 kilograms of rice at $1.50 per kilogram. The initial margin is $4,000 and the maintenance margin is $2,000. (a) What change in (i) balance of margin account and (ii) price per kilogram will lead to a margin call? (b) Calculate the price per kilogram at which the margin call will be issued. (c) Calculate change in (i) balance of margin account and (ii) price per kilogram at which $2,000 could be withdrawn from the margin account. (d) Calculate the price per kilogram at which $2,000 could be withdrawn from the margin account.

Answer 1

Given that,

Operator bought a futures contract = 5,000 kilograms of rice at $1.50 per kilogram

Initial margin = $4,000

Maintenance margin = $2,000

(a)

(i) Balance of Margin = Initial margin - maintenance margin

= $4,000 - $2,000

= $2,000 (loss)

(ii) Change in price =
`(2,000)/(5,000)`

= $0.40

(b) Price per kilogram = Current price - Change in Price

= $1.50 - $0.40

= $1.10

So, change price per kg is $1.10

(c) Balance of Margin = Initial margin - maintenance margin

= $4,000 + $2,000

= $6,000 (loss)

Change in price =
`(2,000)/(5,000)`

= $0.40

(d) Price per kg = Current price - change in price

= $1.50 + $0.40

= $1.90