FUTURES PROBLEM Today (i.e., day 0), the settlement (or closing) price on a Chic

Question

FUTURES PROBLEM

Today (i.e., day 0), the settlement (or closing) price on a Chicago Mercantile Exchange (CME) British pound futures contract is $1.8578/£. Suppose in the next two days (i.e., days 1 and 2) settlement prices are $1.8520/£ and $1.8530/£. The contractual size of one CME British pound contract is £62,500 per contract. The initial performance bond for British pound contract is $1,485 per contract and maintenance performance bond is $1,100 per contract. If you have a long (buy) position in one futures contract, determine the following.

(1) The balances of the maintenance performance bond at the end of day 1 and day 2.

(2) Given the information in (1), how much money you need to deposit to keep your contract active at the end of day 2?

Explanation / Answer

1. Initial value of contract = $1.8578 x 62,500 = $116,112.5

Value at day 1 settlement = $1.8520 x 62,500 = $115,750

Value at day 2 settlement = $1.8530 x 62,500 = $115,812.5

The balances of the maintenance performance bond at the end of day 1 = $1,485 – ($116,112.5 - $115,750) = $1,122.5

The balances of the maintenance performance bond at the end of day 2 = $1,122.5 – ($115,750 - $115,812.5) = $1,185

2.As the available balance of the maintenance performance bond is greater than the required balance ($1,100 per contract), you don’t need to deposit anything.

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