A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call

Question

Darian

Business

7 September, 03:53

A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call

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Answers (1)

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Garrett Douglas · Answer 1

Answer: 72 cents

Explanation:

There will be a margin call when more than $1000 has been lost from the margin account so that the balance in the account is below the maintenance margin level. Because the company is short, each one cent rise in the price leads to a loss or 0.01*50,000 or $500. A greater than 2 cent rise in the futures price will therefore lead to a margin call. The futures price is currently 70 cents. When the price rises above 72 cents there will be a margin call.