An investor takes a long position in a corn futures contract. Initial margin on the contract is 10% of the contract value and maintenance margin is half of the initial margin. If, at the beginning of the second trading day for the contract, the investor receives a margin call, it is least likely that:
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A. B. C.Explanation
Let's break down the information provided in the question:
Initial margin: The initial margin is stated to be 10% of the contract value. This means that when the investor entered into the corn futures contract, they were required to deposit an initial margin amounting to 10% of the total value of the contract.
Maintenance margin: The maintenance margin is stated to be half of the initial margin. In other words, it is 5% of the contract value. The purpose of the maintenance margin is to ensure that the investor maintains a minimum level of margin in their account to cover potential losses.
Margin call: A margin call occurs when the account's margin falls below the maintenance margin level. It indicates that the investor needs to add additional funds to their margin account to bring it back up to the required maintenance margin level.
Based on the given information, we need to determine which scenario is least likely to cause a margin call. Let's analyze each answer choice:
A. Variation margin is greater than maintenance margin: The variation margin refers to the change in the margin account due to daily price fluctuations. It is calculated by comparing the previous day's closing price to the current day's closing price. If the variation margin is greater than the maintenance margin, it means that the investor's margin account has decreased significantly, potentially triggering a margin call. Therefore, it is likely that this scenario could lead to a margin call. Hence, it is not the least likely scenario.
B. The final trade from the previous day is greater than the contract price: This statement is unrelated to margin requirements and does not provide any information about the margin account. The final trade from the previous day being greater than the contract price does not directly impact the margin account or the possibility of a margin call. Therefore, this scenario is least likely to cause a margin call. This option is the correct answer.
C. The average of the last few trades from the previous day is less than the contract price: Similar to option B, this statement does not directly relate to margin requirements. The average of the last few trades being less than the contract price does not provide information about the margin account or the likelihood of a margin call. Hence, this scenario is also unrelated to margin calls and is not the least likely.
In summary, the least likely scenario to cause a margin call, based on the given information, is when the final trade from the previous day is greater than the contract price (Option B).