Final answer:
The student faces a loss of $73,500 on their shorted oil futures contracts due to the price increase from $1.52 to $1.59 per gallon. They will receive a margin call as their account equity falls below the maintenance margin, and they will need to deposit $73,500 to meet the margin requirements.
Step-by-step explanation:
The student shorted 25 oil futures contracts at a price of $1.52 per gallon, and each contract represents 42,000 gallons. After shorting, the settlement price increased to $1.59 per gallon. To calculate the gain or loss, you take the difference between the initial short price and the settlement price, multiply it by the number of gallons per contract, and then by the number of contracts.
The calculation is as follows: (1.52 - 1.59) * 42,000 * 25 = ($0.07) * 42,000 * 25 = ($2,940) * 25 = -$73,500.
This means the student has a loss of $73,500. To determine whether they will receive a margin call, we need to see if the account equity falls below the maintenance margin.
The initial margin is $6,075 per contract multiplied by 25 contracts, which is $151,875 in total. A loss of $73,500 would bring the account equity down to $151,875 - $73,500 = $78,375. As each contract has a maintenance margin of $4,500, for 25 contracts the total maintenance margin is $4,500 * 25 = $112,500. Since the account equity of $78,375 is below this amount, a margin call will occur.
The amount needed to bring the account back up to the initial margin level is the difference between the current equity and the initial margin: $151,875 - $78,375 = $73,500. This is the amount that the student needs to deposit into the account to meet the margin call.