An investor holds a long position in a futures contract on the S&P 500 Index. The futures contract has a term of three months, requires 10% margin, and has a futures price of 1,574. The investor posted $37,500 into the margin account at contract initiation. After the contract initiation, the futures price on the index experienced infrequent but dramatic drops. Two days ago, the investor received a margin call and was required to post an additional $17,500 to the margin account. Which of the following is most likely the maintenance margin on the contract?
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A. B. C.C
To determine the maintenance margin on the futures contract, we need to understand the concept of margin and margin calls in futures trading.
Margin is the amount of money that an investor must deposit into a margin account when entering into a futures contract. It serves as a good-faith deposit and ensures that the investor has sufficient funds to cover potential losses. The margin requirement is typically expressed as a percentage of the contract's value.
The initial margin is the amount required at contract initiation, while the maintenance margin is the minimum amount that must be maintained in the margin account to avoid a margin call. A margin call occurs when the margin account falls below the maintenance margin level, and the investor is required to add more funds to bring the account back to the initial margin level.
In this question, the investor holds a long position in a futures contract on the S&P 500 Index. The contract has a term of three months and requires 10% margin. The futures price at contract initiation is given as 1,574. The investor posted $37,500 into the margin account at contract initiation.
To calculate the initial margin, we multiply the futures price by the contract size (which is typically standardized) and then multiply by the margin requirement percentage:
Initial margin = Futures price * Contract size * Margin requirement
Let's assume the contract size for the S&P 500 Index futures is $250 per point.
Initial margin = 1,574 * $250 * 0.10 = $39,350
Given that the investor posted $37,500 at contract initiation, the remaining amount is $39,350 - $37,500 = $1,850.
Two days ago, the investor received a margin call and was required to post an additional $17,500 to the margin account. To determine the maintenance margin, we can calculate it by subtracting the remaining initial margin from the total margin call amount:
Maintenance margin = Margin call amount - Remaining initial margin
Maintenance margin = $17,500 - $1,850 = $15,650
Therefore, the most likely maintenance margin on the contract is $15,650. However, none of the given answer choices match this amount, so it seems there might be an error in the provided answer options.