Max Fields is a commodity trader who trades for his own account. Max decides to
ID: 2731449 • Letter: M
Question
Max Fields is a commodity trader who trades for his own account. Max decides to go short (sell) November heating oil on August 15, believing that the futures price for the November contract is too high. Currently, the futures price for November heating oil is going for $1.48 a gallon. Heating oil futures contracts involve 5000 gallons and have an initial margin of 6.75%, with a maintenance margin level of 3.45% (below which a maintenance call will occur). Assume Max takes a position involving 3 contracts. a. How much must Max put down to meet his initial margin requirement? b. On August 22 heating oil futures prices for November delivery drop to $1.45 a gallon. Determine the profit or loss Max has made on his November heating oil contracts. c. What is the current balance in Max’s margin account as of the end of trading on August 22? d. At the end of trading on September 5, the futures price for November heating oil stands at $1.55 per gallon. 1.) Determine the account balance of Max’s margin account as of the end of the day. 2.) Will Max face a margin call? If so, how much must he add to his account in the form of variance margin to meet the margin call? Homework Problems: Forward & Futures (Fin. 338) 2 e. On September 7, the futures price for November heating oil rises to $1.57 per gallon. At this point Max decides to enter a reverse trade and close out (unwind) his position. 1.) Determine the short position’s HPY for the November futures contract at the time of the reverse trade. 2.) Determine Max’s total profit/loss realized on his November heating oil position. (Remember, he has held 3 contracts.) 3.) What is Max’s return on investment which he realized by taking his November futures position in heating oil?
THESE ARE THE ANSWERS JUST SHOW ME HOW TO SOLVE PLEASE. THANKS. . a. $1498.50 b. $450 c. $1948.50 d. 1.) $448.50 2.) $1050 (variance margin needed) e. 1.) – 6.08% 2.) - $1350 3.) – 52.97%
Explanation / Answer
a. Initial Margin = Price per gallon * Number of contracts * Contract Size * Initial Margin percentage
Putting the values in the above equation
Therefore, Initial Margin = 1.48*3*5000*6.75%
= $1498.5
b. On August 22
Profit = (Short sell price - Current Market Price) * Number of contracts * Contract Size
= (1.48-1.45)*3*5000
=$450
c. Balance in Max's Margin account as on August 22 = Initial Margin + Profit
=1498.5+450
= $1948.5
d. September 5
1. Profit = (Market price on August 22 - Current Market Price) * Number of contracts * Contract Size
(1.45-1.55)*3*5000
=-$1500
Since the above figure is in negative, Max suffered a loss of $1500
Balance in Margin Account = $1948.5-$1500
=$448.5
2. Maintenance Margin = Contract Price per gallon * Number of contracts * Contract Size * Maintenance Margin percentage
Therefore, Maintenance margin = 1.48*3*5000*3.45%
=$765.9
Since the Balance in the Margin Account ($448.5) is lower than the maintenance margin ($765.9), the balance in the margin account is required to be restored to the original initial margin amount.
Therefore a Margin call of $1050 as calculated below would be made
Margin call = 1498.5-1050 = $1050
e. September 7
1.Holding Period Yield (HPY) = [(Short sell price - Close out price)/short sell price]*100
= [(1.48-1.57)/1.48]*100
= -6.08%
2. Realized Profit = (Short sell price - Close out Price) * Number of contracts * Contract Size
= (1.48-1.57)*3*5000
= -$1350
Since the above figure is in negative, Max realised a loss of $1350
3. Return on Investment = (Profit/Total Investment)*100
= [-1350/(1498.5+1050)]*100
= -52.97%