The futures price of corn is $2.00. The contracts are for 10,000 bushels, so a c

Question

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

I need detailed answers to see work done and learn from that, please.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Part A:

The speculator must initially remit an amount equal to the Margin Requirement of $2000.

Answer for Part A: $2000.

Part B:

Current Value of Contract = Contract Size*Revised Future Price = 10000*2.13 = $21300

Loss to Speculator = Current Value of the Contract - Initial Contract Value = 21300 - 20000 = $1300

Out of the $2000, initially remitted, the speculator has lost $1300 (calculated above), therefore he has a remaining margin of $700 (2000 - 1300) only. He will have to remit another $1300 to reinstate the original margin requirement of $2000.

Answer for Part B: An amount of $1300 will have to be remitted by the speculator to restore the original margin requirement of $2000.

Part C:

If the price continues to rise to $2.14, the speculator will lose an additional amount of $100 (10000*(2.14 - 2.13)). Margin account will therefore have a balance of $1900 (2000 - 100).

Answer for Part C = $1900

Thanks.

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