Understanding Mechanics of Futures Positions

B

In their explanations of the mechanics of utilizing futures contracts, both Tina Kent and Martin Ramsey have made incorrect statements.

Tina Kent's explanation states that administering a futures position requires bringing the margin account balance back to the initial margin level by posting maintenance margin whenever the balance falls below the variation margin level. This statement is incorrect. In reality, the maintenance margin is the minimum amount of equity that must be maintained in the margin account to avoid a margin call. When the margin account falls below the maintenance margin level, the investor will receive a margin call and will be required to add funds to the account to bring it back to the initial margin level, not the variation margin level. The variation margin, on the other hand, represents the daily settlement gains or losses on the futures contract and is settled on a daily basis.

Martin Ramsey's explanation states that margin requirements are determined according to the daily settlement price, which is the average of the last few trades of the day. This statement is also incorrect. The daily settlement price of a futures contract is not determined by the average of the last few trades of the day. Instead, it is typically determined based on a settlement process defined by the exchange where the futures contract is traded. The settlement process may involve taking the average of a specific period of trading or using a predetermined formula to calculate the settlement price. The daily settlement price is used to determine the gains or losses on the futures contract and to calculate the variation margin.

Therefore, neither Tina Kent nor Martin Ramsey is correct in their explanation of the mechanics of futures positions. The correct answer to the question is C. Neither is correct.