You purchased two futures contracts on soybeans at a price quote of 1344′0. The initial margin requirement is $4,750 per contract and the maintenance margin is $3,500 per contract. The contract quantity is 5,000 bushels and the price quote is in cents per bushel. What is the lowest the price quote can go before you receive a margin call?
A)1314′0
B)1315′0
C)1319′0
D)1322′0
E)1325′0

Question

Quizplus · Accepted Answer

To calculate the price that triggers a margin call, we first need to calculate the total value of the two contracts:
Total value = contract quantity x price quote
Total value = 2 x 5,000 x 1344′0 (remember to convert cents to dollars by dividing by 100)
Total value = $134,400

Next, we need to calculate the minimum equity level required to avoid a margin call:
Minimum equity level = total value x maintenance margin
Minimum equity level = $134,400 x $3,500
Minimum equity level = $470,400

Now we can calculate the lowest price that would trigger a margin call:
Price quote at margin call = (minimum equity level - current equity level) / (contract quantity x multiplier)
We know the contract quantity is 5,000 and the multiplier is 100, so:
Price quote at margin call = ($470,400 - (2 x $4,750 x 5,000)) / (5,000 x 100)
Price quote at margin call = ($470,400 - $47,500) / 500,000
Price quote at margin call = $422,900 / 500,000
Price quote at margin call = 0.8458

Finally, we convert the price back into cents by multiplying by 100:
Price quote at margin call = 0.8458 x 100
Price quote at margin call = 84.58 cents

So, the lowest the price quote can go before a margin call is triggered is 1319′0, which is the closest option on the list.

You Purchased Two Futures Contracts on Soybeans at a Price