A speculator purchases a 37,000-pound contract for coffee for $1.08 per pound with an initial margin requirement of 7%. The price goes up to $1.13 in three months. What is the annualized gain?

Question

Quizplus · Accepted Answer

First, we need to calculate the initial margin requirement amount:

Initial Margin = 7% * (37,000 lbs * $1.08/lb) = $2,859.60

Next, we need to calculate the amount gained from the increase in coffee price:

Gain = (37,000 lbs * ($1.13/lb - $1.08/lb)) = $1,850

To annualize this gain, we need to know the number of three-month periods in a year:

Number of 3-month periods in a year = 12 months / 3 months = 4

Annualized Gain = (Gain / Initial Margin) * (12 months / 3 months) = (1850 / 2859.60) * 4 = 264.4%

Therefore, the answer is B.

A Speculator Purchases a 37,000-Pound Contract for Coffee for $1