futures prices of gold and corn

Question

1. The futures price of corn is $ 2.00. The contracts are for 10,000 bushels, so a contract is worth $ 20,000. The margin requirement is $ 2,000 a contract, and the maintenance margin requirement is $ 1,200. A speculator expects the price of the corn to fall and enters into a contract to sell corn.
a) How much must the speculator initially remit?

b) If the futures price rises to $ 2.13, what must the speculator do?

c) If the futures price continues to rise to $ 2.14, how much does the speculator have in the account?

2. The futures price of gold is $ 1,750. Futures contracts are for 100 ounces of gold, and the margin requirement is $ 5,000 a contract. The maintenance margin requirement is $ 1,500. You expect the price of gold to rise and enter into a contract to buy gold.
a) How much must you initially remit?

b) If the futures price of gold rises to $ 1,755, what is the profit and percentage return on your position?

c) If the futures price of gold declines to $ 1,748, what is the loss and percentage re-turn on the position?

d) If the futures price falls to $ 1,738, what must you do?

e) If the futures price continues to decline to $ 1,710, how much do you have in your account?

f) How do you close your position?

Answer 1

For futures, the gain or loss is:

Change in futures price × contract size

1. Corn

The speculator is short corn, so a price increase causes a loss.

a) Initial margin required:

$2,000

b) Price rises from $2.00 to $2.13:

Loss = $0.13 × 10,000 = $1,300

Margin balance:

$2,000 - $1,300 = $700

Since $700 is below the $1,200 maintenance margin, there is a margin call. The speculator must deposit:

$2,000 - $700 = $1,300

This restores the account to $2,000.

c) Price then rises from $2.13 to $2.14:

Additional loss = $0.01 × 10,000 = $100

Account balance:

$2,000 - $100 = $1,900

2. Gold

You are long gold, so you profit when the price rises and lose when it falls.

a) Initial margin:

$5,000

b) Gold rises from $1,750 to $1,755:

Profit = $5 × 100 = $500

Percentage return:

$500 / $5,000 = 10%

c) Gold falls from $1,750 to $1,748:

Loss = $2 × 100 = $200

Percentage loss:

$200 / $5,000 = 4%

d) Gold falls to $1,738:

Loss = $12 × 100 = $1,200

Margin balance:

$5,000 - $1,200 = $3,800

Since $3,800 is still above the stated $1,500 maintenance margin, nothing needs to be done yet.

e) Gold falls to $1,710:

Total loss = $40 × 100 = $4,000

Account balance before any margin call:

$5,000 - $4,000 = $1,000

Since this is below the $1,500 maintenance margin, a margin call occurs. You would need to deposit $4,000 to restore the account to the original $5,000 margin level.

f) To close the position, enter into the opposite futures transaction. Since you originally bought the gold futures contract, you would sell an equivalent futures contract.