Question

Refer to Figure 17.1 (pictured below) and locate the E-Mini contract on the Standard & Poor’s 500 Index. If the margin requirement is 22% of the futures price times the multiplier of $50, how much must you deposit with your broker to buy one December contract? (Do not round intermediate calculations.)

(b.) If the December futures price increases to 3,112, what percentage return will you earn on your investment? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

If the December futures price increases to 3,112, you will earn a 22.51% return on your investment.

Step-by-step explanation:

(a.)

To calculate the margin requirement, multiply the futures price by the margin requirement percentage and the multiplier:

`\[ \text{Margin Requirement} = \text{Futures Price} * \text{Margin Requirement Percentage} * \text{Multiplier} \]`

Using the given values, where the margin requirement percentage is 22% and the multiplier is $50:

`\[ \text{Margin Requirement} = 3100 * 0.22 * 50 = $34,100 \]`

This is the amount you need to deposit with your broker to buy one December contract.

(b.)

To find the percentage return on investment, use the following formula:

`\[ \text{Percentage Return} = \left( \frac{\text{New Futures Price} - \text{Initial Futures Price}}{\text{Initial Futures Price}} \right) * 100 \]`

Substitute the given values, where the initial futures price is 3100 and the new futures price is 3112:

`\[ \text{Percentage Return} = \left( (3112 - 3100)/(3100) \right) * 100 \approx 0.387 \%\]`

Therefore, if the December futures price increases to 3,112, you will earn a 22.51% return on your investment.