5. Suppose an investor has a $1 million long position in T-bond futures. The inv

Question

5. Suppose an investor has a $1 million long position in T-bond futures. The investor's broker requires a maintenance margin of 4 percent, which is the amount currently in the investor's account. (Assume that the initial margin requirement is the same as the maintenance margin requirement.)

a. Suppose also that the value of the futures contract drops by $50,000 to $950,000. How much will the investor be required to pay his broker to maintain his margin? What will be the value of the investor' account balance (assuming no excess) as a result of the price drop?

b. If the futures contract drop in value the next day by another $40,000, to $910,000, how much will the investor be required to pay his broker to maintain his margin? What will be the value of the investor's account balance (assuming no excess) as a result of the price drop?

c. If, on day 3, the futures contract increases in value by $65,000, to $975,000, how much will the investor be able to withdraw from his account to maintain his margin? What will be the value of the investor's account balance (assuming no excess) as a result of the price drop?

D. Suppose, instead, an investor has a $1 million short position in T-bond future and that the value of the futures contract increases by $50,000 to $1,050,000. How much will the investor be required to pay his broker to maintain his margin? What will be the value of the investor's account balance (assuming no excess) as a result of the price drop?

Explanation / Answer

a.) Initial Margin =$0.04x1,000,000 =$40,000

Maintenance Margin =$40,000

Drop in futures =$50,000

Since, the loss is more than the initial margin maintained in the account, the investor will be required to deposit $50,000 to bring the margin back to $40,000.

Ending Account Balance=$40,000

b.) Further drop in futures =$40,000

This loss will bring the account balance back to ($40,000-40,000=0) and hence he will be required to pay $40,000 to his broker to bring the margin back at the required levels.

Ending Account Balance=$40,000

c.) Price increase in futures =$65,000

Amount available in account =$105,000

Amount that can be withdrawn =$65,000

Investors account balance=$40,000

d.) As the position is Short in T-Bond futures, increase in futures price will lead to loss

Intiital Account Balance = $40,000

Amount to be required to pay to his broker= $50,000

Ending Account Balance =$40,000

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