A trader enters into a short position of 20 futures contracts at an initial futures price of 85$. The initial margin, per contract, is $7.50. Maintenance margin, per contract is $7.00. Each contract is for one unit of the underlying asset. Over the next 3 days, the contract settles at $86, $84.25, and $85.50. Assuming the trader does not withdraw any funds from his/her margin account during the period, but does post varition margin sufficient to meet any maintenance margin calls, the balnace in the margin account will be? The answer is $150 at inital and $150 at settlement on day 3. Ok here is my problem: in the CFAI text page 57 volume 6 it states theat the variation margin is the amount sufficient to bring the ending balance up to the INITIAL margin. Why in this problem do we only bring it to the maintenence margin??? Im really confused here b/c in the text they go up to the initial margin, not the maintenence. Thanks.
You cannot go below the amount of the mintenence margin. If you do, you have to put money in to reset the account to the predetermined maintenance margin
strangedays Wrote: ------------------------------------------------------- > You cannot go below the amount of the mintenence > margin. If you do, you have to put money in to > reset the account to the predetermined maintenance > margin This is what I thought and this is what I learned in International finance. But the book states that you must go back to the initial margin…??? I don’t get it.
in futures you have to put money back in to reach the initial margin. so day 1 --> you are off 20$ --> so put back 20$ to make your margin back to 150 On day 2–> you gain 35$ --> Margin is 185, you get the gain, back to 150. Day 3–> you lose 25$ --> put back 25$ to reach the initial margin back to 150. CP
cpk123 Wrote: ------------------------------------------------------- > in futures you have to put money back in to reach > the initial margin. > > so day 1 --> you are off 20$ --> so put back 20$ > to make your margin back to 150 > On day 2–> you gain 35$ --> Margin is 185, you > get the gain, back to 150. > Day 3–> you lose 25$ --> put back 25$ to reach > the initial margin back to 150. > > CP This is how it works: the maintenance margin is a minimum level below which the margin account is not permitted to fall without a margin call. If the value of the margin account falls below the maintenance margin, the trader will receive a “margin call” to deposit additional funds in his margin account.
Hi, trying out this q and can’t seem to get it. Can I get some help please? Here’s my working: IM 150, MM 140 First Day: Lose $20 so margin goes to 130 and you get a margin call and bring it back up to 150 (just trying to work out P/L at this point is it -$20 due to variation margin or -$40 due to variation margin and loss?) Second Day: Gain of $35 so margin is at $185 P&L gain of $35 Third Day: Loss of $25 and margin is at $160. P&L loss of $25 Not getting the $150 answer
when you got to 185, on day 2, they paid you the extra 35 – so you were back at 150. then when you fell 25, that became your variation margin again, which had to be paid to get back to 150… CP
cpk123 Wrote: ------------------------------------------------------- > when you got to 185, on day 2, they paid you the > extra 35 – so you were back at 150. > > then when you fell 25, that became your variation > margin again, which had to be paid to get back to > 150… > > CP From the question, “the trader does not withdraw any funds from his/her margin account during the period” I think $165 stays in the account in day 2 balance drops from $165 to $140 in day 3, margin call brings the balance back to $150
third day loss was 25 only… why does it fall 45?
sorry i messed up it should be from 165 to 140
but 2nd day it goes up to 185… so 185 - 25 = 160. so then they settle? and give the 10 back?
I am so confused. I do it all over again. day 1 ending balance 140, margin call, back to 150 day 2 ending balance 185 day 3 ending balance 160
Glad to see this lil problem wasnt just me. Here is how the book solved it. Initial margin is 20 contracts * $7.50 margin per contract = $150. At the end of day one, the short position has lost $20 [(85-86)*20 contracts]. To meet the required maintenance margin of $140, the short deposits $10 variation margin… (WHAT?) On day 2, the short position has a daily gain of $35 [(86-84.25)*20], bringing the margin account to a abalance of $175. The short position loses $25 on day 3 [(84.25-85.5)*20}, leaving a margin balnce of $150.
Did we ever come to a conclusion on the Q as it still doesn’t make sense to me. Can someone explain one thing, if the price goes below your MM like it does in this case is your loss ($20) PLUS what you need to deposit to get it back to $150 so $20 (total P&L -$40?). What is P&L at this point? Or is it the case that it can never go below your MM and so you lose however much it takes to get down to the MM $10 plus your variation margin to get it back up (in this case another $10 so total P&L -$20)?
If you look at the Errata published by CFA institute, they deleted problem number 8 from the reading. Also, based on other problems of similar nature, the ending balance at day 3 should be $160, because the trader does not withdraw funds, only deposits them if the margin falls below the maintenance.