Trevor Osterman purchases a September 2005 palladium futures contract. At the ti

Question

Trevor Osterman purchases a September 2005 palladium futures contract. At the time his buy order is filled, the price for the 100 troy ounce palladium contract is $19,120. The initial margin is $2,700 and the maintenance margin is $2,000. Trevor holds the contract for two months, during which time he does not receive any margin calls, and sells the contract for $18,310. By what percent does the price fall, and what is Trevor’s annual effective yield rate, assuming he deposits only the initial margin required and that the margin account pays interest at a nominal rate of 2.7% convertible monthly?

Answer: price falls 4.23640%; annual yield 87:77357%

Explanation / Answer

price fall= 19120-18310=810

price fall percentage= (810*100)/19120= 4.236%

here margin amount ratio is 2700*100/19120=14.12%

intial maagin is about 14.12% to the purchase price.

he sold contract for less than 810$ than purchase price

and earned 2700*(0.027/12)*2=12.15$

net worth after 2 month= 2700-810+12.15=1902.15$

after two month net worth percent= (1902.15/2700)*100= 70.45%

now for next 10 month as per same trend = net worth will be= 70.45 * (0.7045)^5 = 12.226%

so net loss will be 100- 12.226 = 87.77%

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