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Homework answers / question archive / Joan Tam is considering a second future’s trade, specifically on coffee
Joan Tam is considering a second future’s trade, specifically on coffee. The future’s price is .56 per pound. Each future’s contract for coffee is based on 37,000 pounds of coffee. Joan will buy two contracts that will expire in April. Based on the size of her position, Joan will be required to post an initial margin of $5,000 with a maintenance margin of $2,500. If the coffee future’s price drops to .55 per pound in Jan, then increases to .57 in February, .58 in March, and to .59 at expiration, what will be the gain or loss each of the four months from January through April? What will be the cumulative balance of Joan’s margin account at expiration?
Initial margin is known as the margin is need when buying a share and maintenance margin is known as the minimum margin should be maintained in the margin account after purchase of stock until sale. So the investor receive margin call when his account balance go below the maintenance margin but the important thing is the margin balance should be brought to initial margin not to the maintenance margin .
Data Given:
Initial margin: $5000
Maintenance margin: $2500
Future’s price is .56 per pound and lot size is 37000 pounds
price drops to .55 per pound which is loss of $0.01 pound per pound of coffee in Jan, so the total loss would be =37000* 0.01=$370
Margin account balance= 5000-370=$4630
price drops to .57 per pound which is gain of $0.01 pound per pound of coffee in Feb, so the total gain would be =37000* 0.01=$370
Margin account balance= 5000+370=$5370
price drops to .58 per pound which is gain of $0.02 pound per pound of coffee in Mar, so the total gain would be =37000* 0.02=$740
Margin account balance= 5000+740=$5740
price drops to .57 per pound which is gain of $0.03 pound per pound of coffee in Apr, so the total gain would be =37000* 0.03=$370
Margin account balance= 5000+1110=$6110
At the expiration the margin account balance would be = $6110