Julia Chen, a portfolio manager for U.S.-based Dane Investments, has just established a short position in Swiss franc currency futures as part of a currency overlay strategy. The position consists of 100,000 contracts with an initial margin of $4,000, a maintenance margin of $2,500, and a contract price of 0.9120 USD/
CHF. If the futures price on the subsequent two days is 0.9300, and 0.8928, respectively, what will be her margin account balance at the end of the second day?
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A. B. C.B
To calculate Julia Chen's margin account balance at the end of the second day, we need to consider the changes in the futures price and the impact on the margin requirements.
Let's break down the steps to determine the margin account balance:
Calculate the initial margin requirement: The initial margin requirement is given as $4,000. This is the amount of money Julia Chen must deposit initially to establish her short position.
Calculate the contract value: The contract value is the notional value of the futures contract. It is calculated by multiplying the number of contracts by the contract price. Contract value = Number of contracts × Contract price In this case, the number of contracts is 100,000 and the contract price is 0.9120 USD/CHF. Contract value = 100,000 × 0.9120 = $91,200
Calculate the margin requirement: The margin requirement is the minimum amount of equity that must be maintained in the margin account. It is usually expressed as a percentage of the contract value. Margin requirement = Maintenance margin × Contract value In this case, the maintenance margin is $2,500 and the contract value is $91,200. Margin requirement = $2,500 × $91,200 = $228,000,000
Calculate the change in the margin account balance: The change in the margin account balance is determined by the change in the futures price. If the futures price increases, the margin account balance decreases, and vice versa. Change in margin account balance = (New futures price - Previous futures price) × Contract value On the first day, the futures price is 0.9120, and on the second day, it is 0.8928. Change in margin account balance = (0.8928 - 0.9120) × $91,200 = -$1,728
Calculate the margin account balance at the end of the second day: To calculate the margin account balance at the end of the second day, subtract the change in the margin account balance from the initial margin requirement. Margin account balance = Initial margin requirement + Change in margin account balance Margin account balance = $4,000 - $1,728 = $2,272
Therefore, Julia Chen's margin account balance at the end of the second day will be $2,272.
None of the given answers (A. $4,000, B. $6,200, C. $7,720) match the calculated margin account balance.