2. Max Fields is a commodity trader who trades for his own account. Max decides

Question

2. Max Fields is a commodity trader who trades for his own account. Max decides to go short (sell) November heating oil on August 15, believing that the futures price for the November contract is too high. Currently, the futures price for November heating oil is going for $1.48 a gallon. Heating oil futures contracts involve 5000 gallons and have an initial margin of 6.75%, with a maintenance margin level of 3.45% (below which a maintenance call will occur). Assume Max takes a position involving 3 contracts.

a. How much must Max put down to meet his initial margin requirement? ($1498.50)

b. On August 22 heating oil futures prices for November delivery drop to $1.45 a gallon. Determine the profit or loss Max has made on his November heating oil contracts.($450 )

c. What is the current balance in Max’s margin account as of the end of trading on August 22? d. At the end of trading on September 5, the futures price for November heating oil stands at $1.55 per gallon. ($1948.50 )

1.) Determine the account balance of Max’s margin account as of the end of the day. ($448.50 )

2.) Will Max face a margin call? If so, how much must he add to his account in the form of variance margin to meet the margin call? ($1050 (variance margin needed) )

e. On September 7, the futures price for November heating oil rises to $1.57 per gallon. At this point Max decides to enter a reverse trade and close out (unwind) his position.

1.) Determine the short position’s HPY for the November futures contract at the time of the reverse trade. (– 6.08%)

2.) Determine Max’s total profit/loss realized on his November heating oil position. (Remember, he has held 3 contracts.) (- $1350 )

3.) What is Max’s return on investment which he realized by taking his November futures position in heating oil? (– 52.97% )

Please answer without the use of excel. In the parenthesis are the answers, I just need the ways to solve them please.

Explanation / Answer

Since, there are multiple parts to the question, the first four have been answered.

________

Part A)

The initial margin requirement can be calculated as follows:

Initial Margin Requirement = Number of Contracts*Quantity Per Contract*Futures Price*Initial Margin

Using the values provided in the question, we get,

Initial Margin Requirement = 3*5,000*1.48*6.75% = $1,498.50

________

Part B)

The profit or loss is calculated as follows:

Profit = Number of Contracts*Quantity Per Contract*(Future Price on August 22 - Futures Price on August 15)

Using the values provided in the question, we get,

Profit = 3*5,000*(1.48 - 1.45) = $450

________

Part C)

The current balance in margin account as of the end of trading on August 22 is calculated as follows:

Current Balance in Margin Account = Initial Margin Requirement + Profit

Using the values calculated above, we get,

Current Balance in Margin Account = 1,498.50 + 450 = $1,948.50

________

Part D)

1) The account balance of margin account as on September 5 is calculated as follows:

Margin Account Balance = Initial Margin Requirement - (Loss on Oil Contracts)

Using the values provided in the question and values calculated above, we get,

Loss on Oil Contracts as on 5th September = 3*5000*1.55 - 3*5000*1.48 = $1,050

Margin Account Balance = 1,498.50 - 1,050 = $448.50

_________

2) Yes, Max will face a margin call as the margin account balance ($448.50) has gone down below the minimum margin required ($1,498.50). The variation margin is calculated as follows:

Variation Margin = 1,498.50 - 448.50 = $1,050

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