An investor sold seven contracts of June/2012 corn. The price per bushel was $1.

Question

An investor sold seven contracts of June/2012 corn. The price per bushel was $1.64, and each contract was for 5000 bushels. The initial margin deposit is $2000 per contract with the maintenance margin at $1250.

How much did the investor have to deposit on the investment?

The prices of the futures on the four days following the short sales were 1.60, 1.66, 1.70, and 1.75. Calculate the current balance on each of the next four days.

If the investor closed out her position on the fifth day, what was her final gain or loss over the five days in dollars and as a percentage of investment?

If the investor kept her position, and the futures price on the sixth day was 1.80, would the investor face a margin call? If yes, how much would she need to put up?

Explanation / Answer

Total initial investment is the initial margin deposit that has to be made before entering the trade.
In this case the initial margin deposit is $2000 per contract.
Investor has entered into 7 contracts.
Total initial investment i.e. the initial margin deposit = $2000 * 7 contracts = $14000

If investor closed the position on day 5, she would face a total loss of 1.75 - 1.64 i.e. $0.11 per bushel.
Total Loss = $0.11* 35000 bushels = $3850

Loss as percentage of investment = (Loss/Investment) * 100 = (3850/14000) * 100 = 27.5%

Day Price per bushel Sale Value Calculation of Change in Value Change in Value of margin Current Margin Balance Margin Call 1                          1.64 57400 0 14000 No.
Margin balance is above $8750 (1250 * 7 contracts) 2                          1.60 56000 (1.64-1.60)*35000 1400 15400 3                          1.66 58100 (1.60-1.66)*35000 -2100 13300 4                          1.70 59500 (1.66-1.70)*35000 -1400 11900 5                          1.75 61250 (1.70-1.75)*35000 -1750 10150 6                          1.80 63000 (1.75-1.80)*35000 -1750 8400 Yes.
Margin balance is below $8750 (1250 * 7 contracts). A margin call will be made for $5600 ($14000 - $8400)

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