A company enters into 5 long January futures contracts of wheat. The contract si

Question

A company enters into 5 long January futures contracts of wheat. The contract size of the wheat futures is 1,000 bushels and the current futures price is $4.00 per bushel. The initial margin requirement is $0.80 per bushel and the maintenance margin is $0.60 per bushel.

a. How much wheat does the company agree to buy/short in January?

b. How much cash does the company have to deposit to the margin account initially?

c. If futures price becomes $4.20 per bushel (5% increase), calculate the cumulative gain.

d. Calculate the rate of return when futures price becomes $4.20. (Hint: use answers to b and c.)

Explanation / Answer

a. Wheat quantity agreed for buying = 5*1000 = 5000 bushels

b. Initial Cash = 0.80*5000 = $4000

c. Cumulative gain = (4.2-4)*5000 = $1000

d. Rate of return = 1000 / 4000 *100 = 25%

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