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11 February, 22:28

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

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  1. 12 February, 01:22
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    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    B. Under what circumstances could $1,500 be withdrawn from the margin account?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
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