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A trader who believes gold reserves will be higher than expected decides to speculate with 2 contracts. The current future price is $1230/ounce. Initial margin is 15,000 and maintenance margin stands at $6000. The contract size is 100 ounces. What price change will lead to a margin call? Under what circumstances a $5000 would be generated

User RAthus
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1 Answer

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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:

  1. Determine the total value of the gold contract: Current future price ($1230/ounce) × Contract size (100 ounces) = $123,000 per contract.
  2. Since 2 contracts were purchased, multiply the contract value by 2: $123,000 × 2 = $246,000.
  3. Calculate the amount needed to reach the maintenance margin: Initial margin ($15,000) - Maintenance margin ($6,000) = $9,000 per contract.
  4. For 2 contracts, this amount is $9,000 × 2 = $18,000.
  5. 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).

User Prrao
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