Explanation:
The futures contract ended at 985 on the first day. This represents a decrease in value in the position of (1,000 − 985) × $250 × 20 = $75,000. The initial margin placed by the manager was $12,500 × 20 = $250,000. The maintenance margin for this position requires $10,000 × 20 = $200,000. Since the value of the position declined $75,000 on the first day, the margin account is now worth $175,000 (below the $200,000 maintenance margin) and will require a variation margin of $75,000 to bring the position back to the initial margin. It is not sufficient just to bring the position back to the maintenance margin.
(Book 3, Module 33.2, LO 33.c)
Ultimate access to all questions.
Question 37
To equitize the cash portion of assets under management, a portfolio manager enters into a long futures position on a stock index with a multiplier of 250. The cash position is $5,000,000, which at the current futures value of 1,000 requires the manager to be long 20 contracts. If the current initial margin is $12,500 per contract, and the current maintenance margin is $10,000 per contract, the variation margin the portfolio manager needs to advance if the futures contract value falls to 985 at the end of the first day of the position is closest to:
A
$25,000.
B
$30,000.
C
$50,000.
D
$75,000.
No comments yet.