Question

The futures price of gold is $1,000. Futures contracts are for 100 ounces of gold, and the margin requirement is $3,000 a contract. The maintenance market requirement is $1,500. A speculator expects the price of gold to rise and enters into a contract to buy gold.

a. How much must the speculator initially remit?
b. If the futures price of gold rises to $1,005, what is the profit and return on the position?
c. If the futures price of gold declines to $998, what is the loss on the position?
d. If the futures price declines to $984, what must the speculator do?
e. If the futures price continues to decline to $982, how much does the speculator have in the account?

Answer 1

a. The initial remittance is the same as the initial margin requirement of $3,000.

b. The profit is;

= 100 ounces * ( 1,005 - 1,000)

= $500

Return is;

= Profit/ Margin

= 500/3,000

= 16.67%

c. The loss is;

= 100 * ( 1,000 - 998)

= -$200

d. If the futures price declines to $984, what must the speculator do?

Depends on if the maintenance requirement is still below the balance.

= 3,000 - 100 * (1,000 - 984)

= $1,400

This is below the maintenance margin of $1,500 and so the speculator will have to deposit an amount that will take it back to the original margin requirement.

= 3,000 - 1,400

= $1,600

Speculator should deposit $1,600.

e. = 3,000 - 100 (1,000 - 982)

= $1,200