Question

A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call? Under what circumstances could $2,000 be withdrawn from the margin accounts?

Answer 1

Step-by-step explanation:

Contract Size = 15,000

Current Futures Price per pound = 160 cents or $1.60

Total Contract Size bought = 15,000 * 2

Total Contract Size bought = 30,000

Initial Margin = 6,000 * 2

Initial Margin = 12,000

Maintenance Margin = 4,500 * 2

Maintenance Margin = 9,000

The Value of the futures contract

Answer 2

Given: The delivery price is$15,000pounds,$ the future price is $160$cents per pound, the initial margin is $$6,000,$ and the maintenance margin is $$4,500.$

1) As we know that in order to lead to a margin call, the futures contract would need to lose $$3,000$ in value.  

As we  know the following relationship for a long futures position:

$=>Profits=(P_{t} -1.60)\times30,000\\=>-3000=(P_{t} -1.60)\times30,000\\\\=>P_{t} =-\frac{3000}{30,000}+1.60\\\\=>1.50$

Hence, in order for a margin call to occur the price would need to fall to$150$ cents per pound.

2) In order to withdraw $$2,000$ from the margin account we will use the same setup as before.

$=>2000=(P_{t} -1.60)\times30,000\\\\=>P_{t} =\frac{2000}{30,000} +1.60\\\\=>P_{t} =1.66$

Hence, the price would need to increase above $166.66$cents per pound to withdraw from the margin account.