The futures price of gold is $1,250. Furutes contracts are for 100 ounces of gold and the requirement is $5,000 per contact. The maintenacnce margin requirement is $1,500. You expect the price of gold to rise and enter into a contract to buy gold.

Required:

a. How much must you initially remit?

b. If the futures price of gold rises to $1,255, what is the profit and percentage return on your position?

c. If the futures price of gold declines to $1,248, what is the loss and percentage return on the position?

d. If the futures price falls to $1,238, what must you do?

e. If the futures price continues to decline to $1,210, how much do you have in your account?

f. How do you close your position?

Answer and Explanation:

a) The amount of initially rent equal to the requirement per contact i. e $5,000

b) Now the Profit is

= Future contract * (rise future prices - initial future prices)

= 100 * ($1,255 - $1,250)

= $500

And, the percentage return is

= Profit : requirement

= $500 : $5,000

= 10.00%

c) Now the loss is

= Future contract * (decline future prices - initial future prices)

= 100 * ($1,248 - $1,250)

= - $200

And, the loss percentage return is

= Loss : requirement

= - $200 : $5,000

= - 4.00%

d) Now of the price of future price falls so the balance in account left is

= Requirement - future contract * (future price of gold - declined future prices)

= $5,000 - 100 * ($1,250 - $1,238)

= $3,800

Since as we can see the balance is more than the maintenance margin so there is nothing to be done

e) Now if the future price continues to falls to $1,210 so

Balance in the account is

= Requirement - future contract * (future price of gold - declined future prices)

= 5000 - 100 * ($1,250 - $1,210)

= $1,000

As we can see that the balance of the margin account is less than the maintenance margin so the initial margin i. e $5,000 is to be deposited

So, the amount deposited is

= $5,000 - $1,000

= $4,000

f) Now for closing the position can be done by entering into the inverse transaction i. e by selling off one futures contract.