Explanation:
We can infer from this information that the contract closed up $0.20 from the previous day's close of $4.95, or $5.15. The trader's short position loses as the price rises, so her loss is ($5.15 – $4.98) × 5,000 = $850. Her margin account will change as follows: $2,500 – $850 = $1,650. Since the balance has fallen below the maintenance margin level, she must make a variation margin payment of $850 in order to bring the account up to the initial margin level.
(Book 3, Module 33.2, LO 33.c)
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Question 7
A futures trader enters a short position in a May wheat futures contract at USD 4.98 a bushel. The price of the previous day's May contract was USD 4.95. Each contract controls 5,000 bushels of wheat and has a daily price limit of $0.20. The initial margin is $2,500 and the maintenance margin is $1,800. During the day, a dramatic change in the weather caused large moves in the price of wheat futures and the contract closed the day limit up (i.e., the contract moved up by its daily price limit, or up $0.20 from the previous day). How much variation margin does the trader need to deposit in her account?
A
No deposit is needed because the contract closed limit up.
B
$150.
C
$850.
D
$1,000.
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