Fred has just sold short 3 contracts of May wheat on the CBT. These are 5,000 bushel contracts. The initial deposit is $1,500 per contract with a maintenance margin of $1,200
(a) What is Fred's total initial margin?
(b) How much of an increase in the price of wheat is necessary to cause a margin call?
What will be an ideal response?
Answer:
(a) (3)($1,500) = $4,500
(b) ($1,500 - $1,200)/5,000 = $0.06
The value of a contract can rise by $300 before a margin call. On a 5,000 contract $300 is equivalent to a six-cent increase per bushel.
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