Yesterday, you entered into a futures contract to buy €62,500 at $1.50/€. Your initial margin was $3,750 (= 0.04 × €62,500 × $1.50/€ = 4 percent of the contract value in dollars). Your maintenance margin is $2,000 (meaning that your broker leaves you alone until your account balance falls to $2,000). At what settle price (use 4 decimal places) do you get a margin call?Group of answer choices$1.500/€none of the options$1.5280/€$1.4720/€
Question
Yesterday, you entered into a futures contract to buy €62,500 at 3,750 (= 0.04 × €62,500 × 2,000 (meaning that your broker leaves you alone until your account balance falls to 1.500/€none of the options1.4720/€
Solution
To calculate the settle price at which you would receive a margin call, you need to determine the price at which your account balance would fall to the maintenance margin of $2,000.
Here are the steps:
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First, calculate the total amount of money you have in your account after entering the futures contract. This is the initial margin of $3,750.
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Then, subtract the maintenance margin from this amount. This gives you the total amount of money you can lose before you get a margin call. In this case, 2,000 = $1,750.
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Next, divide this amount by the size of the contract in euros. This gives you the change in the exchange rate that would cause you to lose this amount of money. In this case, 0.028/€.
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Finally, subtract this amount from the initial exchange rate to find the settle price at which you would get a margin call. In this case, 0.028/€ = $1.472/€.
So, the settle price at which you would get a margin call is $1.4720/€.
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