Explanation

To determine the price change that triggers a margin call, we need to calculate:

Step 1: Calculate maintenance margin per contract

• Initial margin per contract = $14,000
• Maintenance margin = 75% of initial margin = 0.75 × $14,000 = $10,500 per contract

Step 2: Calculate total margin levels

• Total initial margin = 5 contracts × $14,000 = $70,000
• Total maintenance margin = 5 contracts × $10,500 = $52,500

Step 3: Calculate maximum allowable loss before margin call

• Maximum loss allowed = Total initial margin - Total maintenance margin
• Maximum loss allowed = $70,000 - $52,500 = $17,500

Step 4: Calculate price change per ounce

• Each contract represents 100 troy ounces
• Total ounces = 5 contracts × 100 ounces = 500 ounces
• Price change per ounce = Total loss allowed ÷ Total ounces
• Price change per ounce = $17,500 ÷ 500 = $35 per ounce

Step 5: Determine direction of price change Since this is a long position, a drop in gold price will cause losses and trigger a margin call.

Therefore, a $35 drop in the gold futures price will lead to a margin call.

Verification:

• Price drop of $35 per ounce
• Loss per contract = 100 ounces × $35 = $3,500
• Total loss = 5 contracts × $3,500 = $17,500
• Remaining margin = $70,000 - $17,500 = $52,500 (exactly at maintenance margin level)