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 $4000 and the maintenance margin is $2000. What futures price will allow $2000 to be withdrawn from the margin account?? 78 cents 66 cents 74 cents 58 cents
Question
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 2000. What futures price will allow $2000 to be withdrawn from the margin account??
78 cents 66 cents 74 cents 58 cents
Solution
Step 1: Understand the scenario. 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 2000.
Step 2: Understand the concept of margin in futures trading. The initial margin is the amount of money that must be deposited to open a futures position. The maintenance margin is the minimum amount that must be maintained in the margin account after losses have been deducted.
Step 3: Determine the change in futures price that would allow $2000 to be withdrawn from the margin account. Since the company has a short position, it would benefit from a decrease in the futures price. If the futures price decreases, the company would make a gain, and this gain could be withdrawn from the margin account as long as the account balance stays above the maintenance margin.
Step 4: Calculate the change in futures price. If 2000. This gain is the result of a decrease in the futures price. The gain per unit is $2000 / 50,000 units = 4 cents.
Step 5: Subtract the gain per unit from the original futures price to find the new futures price. 70 cents - 4 cents = 66 cents.
So, the correct answer is: 66 cents.
Similar Questions
A company enters into a long futures contract to buy 1,000 units of a commodity for $20 perunit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures pricewill allow $2,000 to be withdrawn from the margin account?(5 marks)d) What is marking-to-market?(5 marks)e) Use the following data for gold and platinum futures (where prices are in dollars per troyounce and margin account balances do not earn any interest) to answer the questions thatfollow:Trading June Gold Futures April Platinum FuturesDate 100 troy oz. per contract 50 troy oz. per contractJan 20 1,594.50 1,874.50Jan 21 1,592.40 1,878.50Jan 22 1,597.70 1,883.10BE332-6-AU/3Suppose that you go short two contracts of April platinum futures on January 20 and longthree contracts of June gold on January 21. Then how much the value of your portfolio at theclosing of January 22 has changed by?(5 marks)(TOTAL: 25 MARKS)QUESTION TWOa) The basis strengthens unexpectedly. How does it affect the position of a short hedger?(5 marks)b) On March 1 the spot price of a commodity is $20 and the July futures price is $19. On June1 the spot price is $24 and the July futures price is $23.50. A company entered into a futurescontract on March 1 to hedge the purchase of the commodity on June 1. It closed out itsposition on June 1. What is the effective price paid by the company for the commodity?(5 marks)c) On March 1 the price of a commodity is $300 and the December futures price is $315. OnNovember 1 the price is $280 and the December futures price is $281. A producer enteredinto a December futures contracts on March 1 to hedge the sale of the commodity onNovember 1. It closed out its position on November 1. What is the effective price receivedby the producer?(5 marks)d) How many types of traders are there in a derivative security market and who are they?(5 marks)BE332-6-AU/4e) Suppose that the standard deviation of monthly changes in the price of commodity A is $2.The standard deviation of monthly changes in the futures price for a contract on commodityB (which is similar to commodity A) is $3. The correlation between the futures price and thecommodity price is 0.9. What hedge ratio should be used when hedging a one monthexposure to the price of commodity A?(5 marks)(TOTAL: 25 MARKS)END OF SECTION A
Suppose that you enter into a short futures contract to sell July silver for $5.15 per ounce on the New York Commodity Exchange. The size of the contract is 5,000 ounces. The initial margin is $4,000 and the maintenance margin is $3,000. Which of the following futures prices represents the smallest change that will lead to a margin call?Group of answer choices$4.95$5.35$5.40$5.15$5.05
A futures trader has a short position in a copper futures contract with an initial margin of $6,000 and a maintenance margin of $4,500. If the trader’s balance is $4,200, what is the size of the required deposit?Group of answer choices$300$1,800$4,500$1,500None of the above
Our company sells a product for $150 per unit. Variable costs are $90 per unit and fixed costs are $18,000. The company expects to sell 800 units this year. What is the contribution margin in total dollars?Group of answer choices$60$18,000$30,000$48,000
An investor short-sold 200 shares of XYZ Company at $70 per share. If the initial margin was 40% and the maintenance margin is 30%, what is the margin-call triggering price for the short position?
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.