An investor enters into a long position in 10,000 futures contracts of oil with a $50,000 initial margin and has a maintenance margin that is 75% of this amount.The futures price associated with this contract is $100.Assuming the price of the underlying asset decreases to $98, what is the margin call?
A)$50,000
B)$37,500
C)$7,500
D)No margin required

Question

Quizplus · Accepted Answer

The value of the position at the initial futures price is:
10,000 contracts x $100/contract = $1,000,000

The initial margin is $50,000, so the leverage is:
$1,000,000/$50,000 = 20

The maintenance margin is 75% of the initial margin, or:
$50,000 x 0.75 = $37,500

If the futures price decreases by $2 to $98, the value of the position is:
10,000 contracts x $98/contract = $980,000

The loss on the position is:
$1,000,000 - $980,000 = $20,000

The margin requirement is:
$20,000/10,000 contracts = $2/contract

The investor's margin balance is now:
$50,000 - $20,000 = $30,000

Since the maintenance margin is $37,500 and the current margin balance is $30,000, the margin call is:
$37,500 - $30,000 = $7,500 (Option C)

An Investor Enters into a Long Position in 10,000 Futures