Your business (US company) will pay out 600,000 British pounds in nine months. Y

Question

Your business (US company) will pay out 600,000 British pounds in nine months. You have decided to fully hedge your company’s foreign exchange risk with futures contracts. Futures contracts for British pounds have an initial margin of $1500 and a maintenance margin of $1100. You decide to use 30 futures contracts, each with 20,000 British pounds attached. You open your position on 12/1/2015. The following table shows the direct quote for British pounds.

Future Price on the date 12/1/15 is $2.113

Future price of the date 12/2/15 is   $2.1

Future price of the date 12/3/15 is $2.115

1. Find your initial margin balance on the day you open your position.

2.Find your ending margin balance on 12/2. Assume the deficits are eliminated to keep the position open and excesses remain in the account

3. Find your ending margin balance on 12/3.

Explanation / Answer

Particulars Amount (in $) Margin Amount Contract Amount Contract Amount £600,000.00 Initial Margin 1500.00 Maintenance Margin 1100.00 Initial Margin on 12/1/2015 (Margin Percentage = 0.25%) 1500.00 Add: Profit 12/2/2015 7800.00 Less: Loss 12/3/2015 9000.00 Margin Balance on 12/3/2015 300.00 Add: Additional Margin contribution 1200.00 Ending Margin Balance on 12/3/2015 1500.00

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