CFA Level IDerivativesHard
A trader enters a short position in a futures contract for 1,000 barrels of crude oil at a price of $85 per barrel. The initial margin is $7,000, and the maintenance margin is $5,000. On the following day, the futures price increases to $87 per barrel. What is the margin balance and will there be a margin call?
- AMargin balance: $7,000; No margin call.
- BMargin balance: $5,000; Margin call for $2,000.
- CMargin balance: $5,000; No margin call.
- DMargin balance: $6,000; No margin call.
Show answer & explanationAnswer & explanation
Correct answer: C. Margin balance: $5,000; No margin call.
With a short futures position, an increase in price results in a loss. The loss is (New Price - Original Price) * Contract Size = ($87 - $85) * 1,000 = $2 * 1,000 = $2,000. The new margin balance is Initial Margin - Loss = $7,000 - $2,000 = $5,000. Since the new margin balance equals the maintenance margin, there is no margin call.
Why the other options are wrong
- A. This implies no loss occurred, which is incorrect for a short position when the price increases.
- B. A margin call would only occur if the balance fell below the maintenance margin.
- D. This calculation of the loss or margin balance is incorrect.
Futures Margin Call
A margin call occurs in futures trading when the margin balance falls below the maintenance margin, requiring the trader to deposit additional funds.
- Initial margin is deposited at the start.
- Maintenance margin is the minimum balance required.
- Daily marking-to-market adjusts the margin balance.
- A margin call requires funds to bring the balance back to the initial margin level.
Memory trick: If your balance dips below the line, you get a call to bring it back in time!