Suppose that the intial margin requirement in a particular futures market is 4%

Question

Suppose that the intial margin requirement in a particular futures market is 4% of the futures price at the time the buyer/seller opens a futures position and that a margin call is issued whenever the amount in a margin account falls below 3% of the futures contract's price. The recipient of the margin call must then bring their margin account account back up to 4 % of the futures contract's price. SUppose further that buyer and seller intially contract for a future purchase/sale of the underlying asset@108,000 but 2 days later the price of the future contract has decreased to $105,000.

A)does anyone receive a margin call? if so, whom and for how much?

B) what happens if the recipeient of a margin call cannot raise the requested funds to meet the margin call?

lillst Patès rise noticeably futures contracts will fall in value, but so will the value of mortgage backed bonds. The firm loses on both of its positions instead of declining Treasury bond 2)Assume the S&P; 500 index has a value of 2200 and its dividend yield is currently 2% per year, the S&P; 500 3 month futures contract has a value of 2250 250, and 3-month interest rates are at a 1% annualized rate a) Is there an opportunity for risk free arbitrage here? If so how would you exploit it.? What would be your risk free profit per futures contract? Yes, risk free arbitrage exists. F should = P+P(ry) to eliminate rfa. But 2250 1250 ( 562500) > Theoretical F = 250* 2200 + 250*2200(.0025-.005) = 548.625 Therefore, Futures are expensive relative to the underlying index. Sell Futures on the S&P; Index @ 2250 250 per contract and buy 250 Shares in an S&P; index fund @$2200 per share for each futures contract sold using funds borrowed in the short term money markets. Hand over the shares you bought at contact expiration. At expiration of the futures contract you receive (2250*250) + (.005)*2200"250 in Dividends =1 .005%220025): $565.250 and you owe on your loan 250*2200*1.0025 =551375. Thus, you have a net gain of $13,875 for each futures contract b) Explain how trades to take advantage of this rfa opportunity eliminate it The above trade, when initiated by arbitragers in large volume, reduces the price of the futures contract and lifts the value of shares in the S&P; index fund. So the gain in part (a) is quickly erased by arbitragers selling futures contracts and buying the underlying asset 3) Suppose the CFO of an insurance company decides to hedge a long position in the corporate

Explanation / Answer

A. Yes.Buyer will receive margin call as price of underlying decresed to $105,000 and he made contract to buy the same at the $108,000 which he making losses and seller gaining through contract.

He will get margin call from brokerage firm and Margin required would be :

If margin fall below : $108,000*3% = $3240 Intial margin level = 4%*$108,000 =$4320

In this case margin falls below $3240 i.e. $108000-$10500= $3000<$3240

So now margin required will be Initial margin - Current level margin = $4320-$3000 = $1320

b.what happens if the recipeient of a margin call cannot raise the requested funds to meet the margin call?

The gap between the margins(required and actual) will keep increasing which occurred loss to trader. Also it will not allow trader to make further decision on his position whether to hold or exit.

Further, Margin are the good faith deposits that keep the exchange clearinghouse running smoothly.

The margin call is the mechanism for the exchange that allows it to stay in business and act as the buyer to every seller and the seller to every buyer.

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