Mike\'s company must pay for 21,000 gallons of heating oil next week. He\'s deci
ID: 2795673 • Letter: M
Question
Mike's company must pay for 21,000 gallons of heating oil next week. He's decided to use the futures market to hedge price risk. The futures price for heating oil was $2.05 per gallon the day he entered into the contract. The contract size is 21,000 gallons. The initial margin is $6,075 and maintenance margin is $4,500. If the price of heating oil is $2.15 the day after Mike opened his position, what would be his ending margin balance for that day? Assume any deficits are eliminated to keep the position open.
Explanation / Answer
Total commitment towards 21000 gallons at $2.05 per gallon = 43050 $
Initial margin $6075
Maintenance Margin $4500
Now price of heating oil changed to $2.15 on next day. As the value of underlying has increased. The position of future buyer has gained .
Total gain = (2.15-2.05)*21000
= 2100 $
So closing margin = initial margin + gain in position
= 6075+2100= 8175 $
As closing margin on the day is above maintenance Margin. There will not be any margin call.