John Saim sells an S&P 500 futures contract for 1,511.21 when the S&P index is priced at 1,509.17. The value of a contract is its price times 250. His broker informs him he must post initial margin of $5,000 and that the maintenance margin is $3,000. The next day the Federal Reserve announces an unexpected reduction in interest rates of 75 basis points for the federal funds rate. The S&P index and futures contract both rise 5%. Compute John’s marked to market margin balance after any variation margin is posted and the amount of his variation margin call. Marked-to-Market-Balance After Posting****************Variation-Margin a. $5,000*********************1 8,889 b. 23,889\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*0 c. -13,889*********************18,889 d. $3,000*********************16,889 It took me 5-minutes to solve this problem (from Passmaster), Do we expect such kinds of problems in the exam?? -Dinesh S
Is the answer C?
it’s A, glad u attempted this anyways. - Dinesh S
Could u pls explain why it’s A? tks.
Don’t we have to calculate the updated SPOT price (1509.17*1.05 = 1584.63)and deduct the price at which he sells the contract (1511.21)? Am i missing sth? Tks.
i don’t think the spot price has anything to do with the calculation as john is selling the future. i am confused though… i thought that the maintenance margin was $3,000 so he would only need a variation margin of 16,889 (as he’s already 2,000 onside?)
It’s A. 1,511.21 + 5% x $250 - $5,000 = -13890 He’s short the futures. It goes 5% against him, therefore he’s lossing money.
dinesh.sundrani Wrote: ------------------------------------------------------- > John Saim sells an S&P 500 futures contract for > 1,511.21 when the S&P index is priced at 1,509.17. > The value of a contract is its price times 250. > His broker informs him he must post initial margin > of $5,000 and that the maintenance margin is > $3,000. The next day the Federal Reserve > announces an unexpected reduction in interest > rates of 75 basis points for the federal funds > rate. The S&P index and futures contract both > rise 5%. Compute John’s marked to market margin > balance after any variation margin is posted and > the amount of his variation margin call. > > Marked-to-Market-Balance After > Posting****************Variation-Margin > a. $5,000*********************1 8,889 > b. 23,889\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*\*0 \> c. -13,889*********************18,889 > d. $3,000*********************16,889 > > It took me 5-minutes to solve this problem (from > Passmaster), Do we expect such kinds of problems > in the exam?? > > -Dinesh S Should take 1 second. John is slaughtered in his short position - easily wiping out his whole margin balance plus some. (S&P goes up about 75 points at $250/pt - ouch). If John wants to keep the account open, he’s got to replace all that money and get back to initial margin of 5000 which is only choice A.
That’s a nice shortcut, Joey!
joey thanks for that… i understand that however i just thought that his account will need to be replenished to his maintenance margin level - not the initial margin level…
it has to be replenished to the initial margin level.
thanks for that… just gone back to my notes… that clears up a lot now. thanks 