1. A trader buys two July futures contracts on frozen orange juice. Each contrac

Question

1. A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call? Under what circumstances could $2,000 be withdrawn from the margin account? 2. Generally speaking, higher income countries tend to have less income inequality than low income countries, however this does not always hold true. What could cause a low income country to have low income inequality'1

Explanation / Answer

Answer:

A Margin Call in the Future Contracts is the demand made by the Broker of deposits from the Investor to maintain the initial level of position. (Original Position). Hence in the above example for the Margin Call to occur the futures contract would need to lose $3,000 (aggregated from the value of both the contracts). The margin call to occur the price of orange juice per pound needs to decrease by $0.10/pound ($3000 ÷ 30,000 = $0.10).

The price of orange juice thus has to be $1.50/pound ($1.60 - $0.10) or to 150 cents per pound for the margin call.

Part B

In order to be able to withdraw $2,000 from the margin account the price per pound should increase as this would be the opposite of the above situation:

$2,000 ÷ 30,000 = 0.066666..... recurring therefore ($1.60+0.066..)

Hence the price of orange juice should increase above the mark of $ 1.66 per pound or 166.66 cents per pound.  

2)

Income inequality has become a primary characteristic of the low income countries but on the other side a low income country can also have low income inequality due to the following reasons:

Considering the mixture of the above factors present in a low income country it will have more chances to have lesser income inequality despite of its low income classification.

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