The current price of gold is $1,800 an ounce, and the current futures price is 1

Question

The current price of gold is $1,800 an ounce, and the current futures price is 1,850 an ounce. Suppose you expect the price of gold to rise and you enter a long position into a future contract to buy gold. Assume that each gold contract is for 100 ounces of gold, the initial margin requirement is 10% and the maintenance margin is 5%.

(a) What is the amount that you must deposit (either in cash or in securities) into your margin account to
open the future contract?
(b) Suppose that the price of the future contract increases by 1%. What will happen to your margin
account?
(c) Suppose that the price of the future contract falls to $1750. What will happen to your margin
account? What if anything must you do?

Explanation / Answer

a) 100*1800*.1=$18000(Initial Margin)

B) Profit = 18.5*100=1850 he can take out from his account. Margin account remains intact.

C)Loss of =100*100=10,000

Maintainance margin is =9,000

Initial margin lowers down to =18,000-10,000=8,000 which is lower than Maintainace margin. Hence investor has to add 10,000 to the account to recoup to initial margin (18,000) level.

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