Hi, someone who could help me solve these questions from risk management? Thank

Question

Hi, someone who could help me solve these questions from risk management? Thank you!

The following are futures prices of copper, in $ per pound, at the end of each corre- sponding month for the September and November contracts.   

The contract size is 25,000 pounds. The initial margin requirement per contract is $12,000 and the maintenance margin is $10,000. The contracts are settled (market-to- market) at the end of every month. At the end of July, a company took a short position on a September contract to hedge its exposure to the price of copper. At the end of September, the company rolled over the position to the November contract and kept it open until maturity.

Q1: Were there any margin calls to the company and if yes, how much did the company have to deposit at each margin call?

Q2: What were the cash-flows of the company from this rolling hedge? (The deposits in the margin account are not cash-flows.)

Month July August September October November September contract 3.02 3.12 2.95 November contract 3.01 2.92 2.97

Explanation / Answer

Ans 1) Since company is short on the contracts, company will be beneffited by price depriciation and worse off in price appriciation.

if price chages from 3.02 to 3.12 then company is worse off in this case company will lose (3.12 - 3.02) * 25000 = $2500.

Since maintenance margin is $10000 after this price appriciation value of intital margin will decrease from $12000 to $9500(12000 - 2500), which is less than $10000. So there will be margin call of $2500 for maintaining the intial margin. In all other cases there will be no margin call.

If Company close its position in september then cashflow = $(3.02 - 2.95)* 25000 = $1750

If company closes its position in november then cashflow = $(3.02 - 2.97) * 25000 = $1250

So company will be worse off using the roll over by $500 on each contract.

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