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Corporate Finance seminar 4
Problem 1.
Consider the gold futures contract with 5 months to maturity (contract size 100 ounces,
quotation $/ounce). Suppose that a firm buys 20 contracts when the futures price is at 95
and the following settlement prices are recorded in the subsequent days are: F1=91; F2=92;
F3=90, F4=88, F5=100. The initial margin is 20% of the size of the future position and the
maintenance margin is 75% of the initial margin.
A margin is a cash or marketable security deposited by an investor to their broker. The
balance in the margin account is adjusted to reflect daily settlement. Margins minimise the
possibility of a loss through a default on a contract. A retail trader has to bring the balance in
the margin up to the initial margin when it falls below the maintenance margin level.
The settlement price (or rate) is called spot price (or spot rate). A spot contract
is in contrast with a forward contract or futures contract where contract terms are
agreed now but delivery and payment will occur at a future date.
a. Describe the margin account evolution over these 5 days assuming that the firm answers
all margin calls.
Contract size = 100oz
5 months to maturity
Buy 20 contracts at time 0 at price 95
Initial margin = 20% of the size of the future position
Maintenance margin = 75% of initial margin
20*100*95 = 190000 Value of position
0.2*190K = 38000 Initial margin
0.75*38K =28500 Maintenance margin
Long position - fall in futures prices implies reduction in margin account balance vice versa.
Day Futures price Change in Account level Variation margin
balance
0 95 38K
1 93 -$2*100*20 = 34K
-$4K
2 92 -$1*100*20 = 32K
-$2K
3 90 -$2*100*20 28K < +$10000
=-$4K Maintenance
margin - close
out position or
top up to initial
margins level.
, 4 88 -2*100*20 34K
5 100 12*100*20 58K
Futures price vs spot price.
At F1: Futures > Spot
At F2: Futures > Spot
At F3: Futures > Spot
At F4: Futures > Spot
At F5: Futures < Spot
Between F1 and F4: Can sell short a futures contract, buy the asset and make delivery.
Lecture 2
b. Describe the evolution of the margin account if the firm is short 30 contracts. Comment
on the potential trading strategies given the margin account.
Short futures position (selling contract). - Fall in futures price implies an increase in the
margin account balance and vice versa.
Day Futures price Change in Account Variation
balance level margin
0 95 57000
1 93 2*100*30 6000 63000
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