Answer-first summary for fast verification
Answer: The investor has excess margin on two of the days
**A. True.** The investor has excess margin on two of the days; on day four (4) and day seven (7), the investor has a balance in excess of the initial margin. In regard to **(B), (C), and (D)**, each statement is **FALSE**. - In regard to false **(B)**, margin calls are triggered when the margin balance falls below the maintenance margin. - In regard to false **(C)**, margin calls are not necessarily triggered when the margin balance falls because the maintenance margin is likely set below the initial margin. - In regard to false **(D)**, this neglects the margin calls. The holding period return is more like \((59.0 - 26.0 - 22.0 - 60.0)/60.0 = -81.67\%\)!
Author: Manit Arora
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Q-708.3. The table below itemizes an investor’s long position gold futures contracts. On the first day, the investor buys ten (10) contracts when the futures price is $1,200.00. Because the initial margin is $6,000 per contact, the investor must deposit a total of $60,000 in the margin account. The maintenance margin is $4,000 per contract. Over the subsequent eight days, the futures price fluctuates as shown.
| Contract size (ounces / contract) | 100.0 |
|---|---|
| Number of contracts | 10.0 |
| Total trade units | 1,000.0 |
| Margin requirements | Per | Number of Contracts | Total |
|---|---|---|---|
| Initial margin | $6,000 | 10 | $60,000 |
| Maintenance margin | $4,000 | 10 | $40,000 |
| Day | Trade | Settle | Daily | Cum’l | Balance | Call? |
|---|---|---|---|---|---|---|
| 1 | 1,200.00 | 60,000.0 | ||||
| 1 | 1,190.00 | (10,000.0) | (10,000.0) | 50,000.0 | - | |
| 2 | 1,185.00 | (5,000.0) | (15,000.0) | 45,000.0 | - | |
| 3 | 1,174.00 | (11,000.0) | (26,000.0) | 34,000.0 | 26,000.0 | |
| 4 | 1,180.00 | 6,000.0 | (20,000.0) | 66,000.0 | - | |
| 5 | 1,165.00 | (15,000.0) | (35,000.0) | 51,000.0 | - | |
| 6 | 1,152.00 | (13,000.0) | (48,000.0) | 38,000.0 | 22,000.0 | |
| 7 | 1,155.00 | 3,000.0 | (45,000.0) | 63,000.0 | - | |
| 8 | 1,151.00 | (4,000.0) | (49,000.0) | 59,000.0 | - |
Which is following statements about this scenario is TRUE?
A
The investor has excess margin on two of the days
B
The margin calls are triggered only when the investor closes out contracts
C
The simulation is missing margin calls on days one (1), two (2), and five (5)
D
The investor's holding period return is a loss of about 1.67%, which is equal to -1,000 ÷ 60,000
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