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 is 40,000 lbs. * $.59 = $23,600. A 4% initial margin is $23,600 * 0.04 = $944. The price drop to $.57 per lb. makes the new contract value 40,000 lbs. * $.57 = $22,800. The loss is $23,600 - $22,800 = $800. Since the maintenance margin is $500 and the loss ($800) exceeds both the initial margin and the maintenance margin, you must replenish the difference between the loss and the initial margin, which is $800 - $944 = -$144. However, since you cannot add a negative amount, you actually need to ensure the account has at least the maintenance margin. The correct calculation should consider bringing the account back up to the initial margin level or covering the loss to maintain the position, which was not accurately reflected in the initial explanation. The correct approach is to calculate how much the margin account falls below the maintenance margin after the loss. With an $800 loss, the margin account would be reduced to $144 ($944 - $800). Since the maintenance margin is $500, you need to add enough to bring the account back up to this level. Therefore, you need to add $356 ($500 - $144) to meet the maintenance margin requirement.

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