Future contracts

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vitamin

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Hi...

I don't understand how a future is traded. And with this example, I don't understand why is it a "positive" instead of a "negative" answer.

(Question from Schweser)
Three 125,000 euro futures contracts are sold at a price of $1.0234. The next day the price settles at $1.0180. The mark to market for this account changes the previous day's margin by:

answer is +$2,025 (1.0234-1.0180) x 125000 x 3 = 2025

I am lost on the concept. Why is a price decline an addition to margin?

Thanks again!!
 
Because they are sold, not bought. It's a short position, not long.
 
Thanks guys!

And I'm just looking at another question that I think it is based on the same concept as the above question, and I want to make sure I am on the right track...question from Schweser again:

A silver futures contracts requires the sellers to deliver 5000 Troy ounces of silver. An investor sells one July silver future contracts at a price of $8 per ounce, posting a $2025 initial margin. If the required maintenance margin is $1500, the price per ounce at which the investor would first receive a maintenance margin call is closest to:

answer is $8.11

Am I correct that: for a margin call to occur, some money should be losing, and since it is a sell, I am suppose to figure out the increased selling price after the investors sold at $8?

thank you very much!
 
You have to determine what price increase will cause a margin call:

Calculate the Margin Percentages
IM = 2025/40000 = 5.0625%
MM = 1500/40k = 3.75%

5.0625-3.75 = 1.3125%

1.013125 * 8 = 8.105 =~ 8.11
 
Note that for a long position and the same numbers a call would @ (1 - 0.013125) * 8

The posted margin (IM) is a percentage of the price, the Maintance margin is maintance level so the price can drop exactly that percentage difference before a call is had. If one the other hand you are given a question saying something like a $10 contract (100,000 dollars value) with a IM of $1 and MM of $0.5 then you know the price can actually drop to 9.5 for a long and rise to 10.50 for a short before a call is had.



Edited 1 time(s). Last edit at Thursday, May 4, 2006 at 12:13AM by jamespucyk.
 
that really helps, thanks for being so helpful!
 
jamespucyk Wrote:
-------------------------------------------------------
> You have to determine what price increase will
> cause a margin call:
>
> Calculate the Margin Percentages
> IM = 2025/40000 = 5.0625%
> MM = 1500/40k = 3.75%
>
> 5.0625-3.75 = 1.3125%
>
> 1.013125 * 8 = 8.105 =~ 8.11

James - dude, this is the easiest that I've seen this exact question layed out. The answer in Schweser (which I also was looking at this exact question tonight) is way harder to understand...not to mention the answer that (I think) financegirl posted a couple weeks ago, which I totally didn't follow.

I don't fully understand what you're doing here with the percentages? I also, like Vitamin, am having a hard time understanding why it's an addition to margin? They also listed $7.89 ($8.00 - $0.11) as a possible answer...I guess what I'm confused about is how did we know that it had to be 8 + 0.11?

Well, I guess if I approach it your way James, it's wayyy easier to see. So you just found the spread between margin percentages and multiplied it by the contracted price/ounce?
 
NP, anytime. The way I usually handle futures margin is calculate the price change that will cause a margin call and adjust it to the price. I.e. subtract it from a long position or add it to the short. Also for equities I really like Schweser's method (1- IM / 1 -MM) * P for a long margin call price and (1+IM / 1+MM ) * P for a short sale margin Call.
 
Basically, the key here is to understand that an actual price change will cause a major margin fluctuation considering the highly leveraged position, when dealing with very small margin percentages a very small change in price will cause a major margin fluctuation.

Basically at T0 the contract was taken out for $40k (8*5000) in value, with a given IM and MM amount you can easily derive the margin rates for the various percentages and then understand the price has a major effect on the margin position within the account, specifically a positive rise in price that would cause the margin to drop to $1500 will cause a call, so just solve for the drop.

Alternatively this is an easier way to solve for it.
(2025 - 1500 / 40000 + 1) * 8 = 8.105
 
Thanks bro...so because we know that they entered into the contract to sell it at that price...yeah, I see it now, if the price rises they could/ve profited by selling it at the higher price ($8.11), which would trigger the margin call, cuz it's going the wrong way for their benefit.

Damn, I can't coherently get out what I'm trying to say, but I think I understand it now. So we know that it'll be called if the price rises, cuz they'll be in danger of maintaining their margin agreement?

Thanks dude...although I def need to do more practice questions like these. Have a good night.
 
Yup, I think you got it. Price goes up, good for the long, Price down good for the short...
 
Another way to look at it is this.

You know you are the short on the futures side, so you are afraid of the price going up (just know that exact expression - if you are a short, you are afraid of the price going up). You will receive a margin call when your Initial margin falls below your Maintenance margin. The formual is this.

(X - 8) * 5000 = 2025 - 1500, where X is the price you will receive the margin call at. You read this formula like this.

How much money will I lose on 5000 ounces of silve, (X - 8) * 5000, that will equal the amount by which the initial margin will have to fall to reach the maintenance margin (2025 - 1500).
 
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