Final answer:
A trader will face a margin call on their gold futures contracts if the gold price drops by $90/ounce.
Step-by-step explanation:
A trader speculating on the gold futures market needs to be aware of how changes in the gold price can trigger a margin call. Let's say the current future price is $1230/ounce, and the trader has 2 contracts with the initial margin set at $15,000 and a maintenance margin at $6,000. The contract size is 100 ounces. A margin call occurs when the account balance falls below the maintenance margin requirement.
To calculate the price change leading to a margin call, here is the formula:
- Determine the total value of the gold contract: Current future price ($1230/ounce) × Contract size (100 ounces) = $123,000 per contract.
- Since 2 contracts were purchased, multiply the contract value by 2: $123,000 × 2 = $246,000.
- Calculate the amount needed to reach the maintenance margin: Initial margin ($15,000) - Maintenance margin ($6,000) = $9,000 per contract.
- For 2 contracts, this amount is $9,000 × 2 = $18,000.
- Divide this amount by the contract size × number of contracts: $18,000 / (100 ounces × 2) equals a $90/ounce price drop before a margin call.
To generate a $5,000 profit, the trader must experience an increase in the price of gold beyond the purchase price and the associated costs. If the trader exits the contracts with a gold price increase of $50/ounce, they would realize a $10,000 profit before fees (ignoring transaction costs and other potential fees for simplicity).