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  • Initial Margin and Maintenance Margin On Currency Futures

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    stephani
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    The document discusses initial and maintenance margin requirements for a currency futures contract. It provides a table showing the settlement price over four days, and calculates the corresponding contract price, margin adjustment, margin contribution/withdrawal, and ending margin account balance. On the first day, as the settlement price increases, the margin adjustment leads to a $1,000 gain in the margin account. On the second day, a lower settlement price causes a $2,400 loss and margin call. By the fourth day, the higher settlement price results in a $2,200 gain and $1,900 withdrawal from the margin account.

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    Initial margin and Maintenance margin on currency futures (1)

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    The document discusses initial and maintenance margin requirements for a currency futures contract. It provides a table showing the settlement price over four days, and calculates the corresponding contract price, margin adjustment, margin contribution/withdrawal, and ending margin account balance. On the first day, as the settlement price increases, the margin adjustment leads to a $1,000 gain in the margin account. On the second day, a lower settlement price causes a $2,400 loss and margin call. By the fourth day, the higher settlement price results in a $2,200 gain and $1,900 withdrawal from the margin account.

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    © All Rights Reserved
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    15 views2 pages

    Initial Margin and Maintenance Margin On Currency Futures

    Uploaded by

    stephani
    The document discusses initial and maintenance margin requirements for a currency futures contract. It provides a table showing the settlement price over four days, and calculates the corresponding contract price, margin adjustment, margin contribution/withdrawal, and ending margin account balance. On the first day, as the settlement price increases, the margin adjustment leads to a $1,000 gain in the margin account. On the second day, a lower settlement price causes a $2,400 loss and margin call. By the fourth day, the higher settlement price results in a $2,200 gain and $1,900 withdrawal from the margin account.

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    © All Rights Reserved
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    of 2

    Initial margin and Maintenance margin on currency futures.

    Suppose an investor has purchased a CAD 100,000 future contract at $0.84/CAD. The margin is
    $3,000 with a maintenance level of $1,500. The following table gives the settlement price at the
    end of four days:

    Day Settlement Contract Margin Margin Margin


    Price Price Adjustment Contributio Account
    ($/CAD) n/Withdraw
    al
    Opening 0.84

    First 0.85
    Settlement
    Second 0.8260
    Settlement
    Third 0.8230
    Settlement
    Fourth 0.8450
    Settlement

    a. Calculate the contract price, margin adjustment, margin contribution or withdrawal, and
    the margin account at each settlement price (without withdrawing the additional amount).

    Day Settlement Contract Margin Margin Margin


    Price Price Adjustment Contributio Account
    ($/CAD) n/Withdraw
    al
    Opening 0.84 $84,0001 0 $3,0002 $3,000

    First 0.85 $85,000 $1,0003 0 $4,0004


    Settlement
    Second 0.8260 $82,600 -$2,400 05 $1,600
    Settlement
    Third 0.8230 $82,300 -$300 $1,7006 $3,0007
    Settlement
    Fourth 0.8450 $84,500 $2,200 0 $5,200
    Settlement
    1
    0.84x100,000
    2
    initial margin (set in the given above)
    3
    85,000-84,000
    4
    Previous margin account balance + Margin adjustment = 3,000+1,000

    1
    5
    No contribution since the margin account will fall to 4,000-2,400=1,600 > minimum cash
    balance or maintenance margin ($1,500). No margin call issued and no need to top up the margin
    account with cash back up to the initial margin of $3,000.
    6
    Since the margin account drops below the maintenance margin of $1,500, a margin call will be
    issued to top up the margin account with cash, back up to the initial margin of $3,000 so the
    margin contribution should be equal to: 3,000 – (1,600-300) = $2,700.
    7
    We added to the margin account $2,700 due to the margin call, we get back to the initial margin
    of $3,000.

    b. Repeat but with withdrawals:

    Day Settlement Contract Margin Margin Margin


    Price Price Adjustment Contributio Account
    ($/CAD) n/Withdraw
    al
    Opening 0.84 $84,0001 0 $3,0002 $3,000

    First 0.85 $85,000 $1,0003 -$1,0004 $3,0005


    Settlement
    Second 0.8260 $82,600 -$2,400 +$2,4006 $3,000
    Settlement
    Third 0.8230 $82,300 -$300 07 $2,700
    Settlement
    Fourth 0.8450 $84,500 +$2,200 -$1,9008 $3,000
    Settlement
    1
    0.84x100,000
    2
    initial margin (set in the given above)
    3
    85,000-84,000
    4
    All additional amounts on top of the $3,000 initial margin should be withdrawn.
    5
    The margin account remains at $3,000 after $1,000 gain and $1,000 withdrawal.
    6
    With $2,400 loss, the margin account drops to 3,000 – 2,400 = 600 < 1,500 maintenance
    margin. Hence, the futures buyer a margin call to top up the margin account with cash, back up
    to the initial margin of $3,000 so the margin contribution should be equal to: 3,000 – (3,000-
    2,400) = $2,400.
    7
    No contribution since the margin account will fall to 3,000-300=2,700 > minimum cash balance
    or maintenance margin ($1,500). No margin call issued and no need to top up the margin account
    with cash back up to the initial margin of $3,000.
    8
    We withdraw from the margin account (2,700+2,200) – 3,000 = $1,900, which is the additional
    amount on top of the initial margin of $3,000.

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