Final answer:
The student will calculate their profits or losses from the changes in settlement prices of the EUR futures contract over three days and adjust their margin account. Profits are made on days the settlement price falls and losses on days it rises. After the three-day period, the student's margin account balance increases to $2,837.50.
Step-by-step explanation:
The student's question involves calculating the changes in a margin account due to daily marking-to-market of a futures contract and determining the account balance after a series of settlement prices, given that the student has a short position in a CME EUR futures contract. To address the question, we'll need to compute the profit or loss from each day's movement in the settlement price and adjust the margin account accordingly.
On the first day, the settlement price changes from $0.9716 to $0.9702. With a short position, the student profits from a price decrease. The profit is calculated as the difference in settlement prices multiplied by the contract size, which is (0.9716 - 0.9702) x 125,000 = $175. The new balance in the margin account is $1,700 (original balance) + $175 (profit) = $1,875.
On the second day, the settlement price increases from $0.9702 to $0.9709. This results in a loss for the student: (0.9702 - 0.9709) x 125,000 = -$87.50. The adjusted margin balance is $1,875 - $87.50 = $1,787.50.
On the third day, the price decreases from $0.9709 to $0.9625, giving the student a profit: (0.9709 - 0.9625) x 125,000 = $1,050. The final balance after the third day is $1,787.50 + $1,050 = $2,837.50.