Explanation:
C is correct. With an automatic netting arrangement in place, the variation margin for the member will be the difference between the variation margin on the long contract and the short contract. The variation margin on the long contract equals 5,000 bushels × (4.95 - 4.75) = 1,000. The variation margin on the short contract equals 5,000 bushels × (5 - 5.15) = -750. So, the difference is positive USD 250.
A is incorrect. This answer choice reflects the variation margin of the short contract only.
B is incorrect. This answer choice assumes that the contracts are netted so that no variation margin is required on either contract.
D is incorrect. This answer choice reflects the variation margin of the long contract only.
Learning Objective: Describe the implementation of a margining process; explain the determinants of and calculate initial and variation margin requirements.
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Q-21. A member of a commodity exchange holds positions in multiple corn futures contracts over several consecutive days. One corn futures contract represents 5,000 bushels. Information about the futures positions and daily settlement prices is given below:
| Position | Settlement price (in USD per bushel) |
|---|---|
| Day 1 | |
| Long September 1 corn contract | 4.75 |
| Short December 1 corn contract | 5.00 |
If the exchange has an automatic netting arrangement in place, what is the variation margin for the member at the end of day 2?
A
The member pays USD 750.
B
The member neither pays nor receives any USD.
C
The member receives USD 250.
D
The member receives USD 1,000.
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