A company enters into a short futures contract to sell 5,000 bushels of wheat for 250 cents per bushel. The initial margin is $3,000 and the maintenance margin is $2,000. At what price would there be a margin call

A.$2.7

B.$2.2

Explanation:

250 cents = $2.5

Therefore to have a margin call, if one contract has to lose means:

Loss=initial margin-maintenance margin

$3,000-$2,000=$1,000

The margin call if the contract has to lose more than $1,000

Since entering into a short futures contract to sell 5,000 bushels of wheat for 250 cents per bushel, the price change lead to a margin call is:

magin lcall = ($2.5-Pt) x5,000

-$1,000 = ($2.5-Pt) x5,000

Pt=1,000/5,000+2.5=$2.7

The future price of contract rises by $0.2 from $2.5 to $2.7 per bushel which will lead to a margin call.

B. Under what circumstances could $1,500 be withdrawn from the margin account?

The contract is gained $1,500 when we could withdraw $1,500 from the margin account. Hence:

Profit = ($2.5-Pt) x5,000

$1,500 ($2.5-Pt) x5,000

Pt=2.5-1,5005,000=$2.2

Therefore, to withdraw from the margin account, the future price must falls by 30 cents from $2.5 to $2.2