You purchased one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.Initial margin on the contract was 4% of the contract price with a maintenance margin of $500.By the end of the day, the price had fallen to $.57 per lb.How much will you be required to add to your margin account to replenish your maintenance margin?

Question

Quizplus · Accepted Answer

The initial value of the contract was $.59/lb * 40,000 lbs = $23,600. With a 4% initial margin, you deposited $944. The price drop to $.57/lb changes the contract value to $.57/lb * 40,000 lbs = $22,800. The loss is $23,600 - $22,800 = $800. Since the maintenance margin is $500 and you've lost $800, your margin account is below the maintenance margin by $300 ($800 loss - $500 maintenance margin). However, to bring the account back to the initial margin level ($944), you need to add $800 (to cover the loss and return to the initial margin status), not just the difference to meet the maintenance margin. Therefore, the correct answer is not provided in the options, indicating a potential mistake in the calculation or the interpretation of the question.

You Purchased One July Futures Contract of Pork Bellies at $.59