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CHP 2 Practice Questions

The document describes a margin account for an investor holding a short position on 3 copper futures contracts. [1] The initial margin required was $6,000 and the first margin call occurred on July 2nd when the investor had to deposit an additional $2,250 to meet the maintenance margin. [2] The closing price on July 1st was $3.73 per pound. [3] The cumulative loss as of July 11th when the position was closed was $4,500.

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44 views

CHP 2 Practice Questions

The document describes a margin account for an investor holding a short position on 3 copper futures contracts. [1] The initial margin required was $6,000 and the first margin call occurred on July 2nd when the investor had to deposit an additional $2,250 to meet the maintenance margin. [2] The closing price on July 1st was $3.73 per pound. [3] The cumulative loss as of July 11th when the position was closed was $4,500.

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Practice question (futures contracts and margin account)

The following is a table representing transactions in a margin account for a possible sequence of copper
futures prices from July 1 to July 11. Here is some information related to the table: 3 contracts are held
by the investor and the size of one contract is 25 000 pounds of copper.

• The position was opened early July 1st at a price of $3.72 per pound.
• The position was closed on July 11 at the end of the day.
• The initial margin is $2 000 per contract.
• The maintenance margin is $1 500 per contract.
• The future prices shown in the table are closing prices in dollars per pound of copper.
• The numbers displayed in the other columns are calculations for all contracts.

Futures Gain Gain (loss) Margin Margin


Date price (loss) cumulative account calls
01-july ??? -750 ??? ??? ???
02-july 3.75 -1500 ??? ??? ???
03-july 3.77 -1500 -3750 ??? ???
⋮ ⋮ ⋮ ⋮ ⋮ ⋮
09-july 3.73 -3750 -750 ??? ???
10-july ??? ??? ??? ??? ???
11-july 3.78 -3000 ??? ??? ???

a) Does the investor have a long or short position? Justify your answer.
b) How much did the investor have to place in the margin account when entering the market?
c) What was the future closing price as of July 1st?
d) On what date was the first margin call made and how much did the investor have to place in the
account?
e) What number should be displayed in the "Cumulative gain (loss)" column. "column for July 11?
Justify your answer.
Solution

a) The investor has a short position because he makes losses when the futures price rises.

b) The amount was to be 3 × $ 2,000 = $ 6,000.

c) As of July 1st , the closing price was

750
−750=( 3.72−F 1 jul y ) ×3 × 25000→ F1 july = + 3.72=3.73
3× 25000

d) The first margin call took place on July 2. Indeed, the margin account was :

July 1:6000−750=5 250

July 2:5 250−1500=3 750

Since 3,750 is less than the maintenance margin of 3 × 1,500 = 4,500, the investor must have
placed 6,000 - 3,750 = $2,250.

e) The cumulative gain as of July 11 can be calculated with

Cumul . gain=( F entr y −F exit ) × 3× 25 000

Cumul . gain=( 3.72−3.78 ) × 3× 25 000=−4 500 $

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