Question

A company enters into a short futures contract to sell 5000 bushels of wheat for 571'4 cents per bushel. The initial margin is $ 1500 and the maintenance margin is $1100. At what price will you receive a margin call? Please write your answer in cents and in the format as 570.5 (one decimal point, no dollar sign).

Answer 1

Answer:

563.4 cents

Explanation:

A margin call occurs when the margin of an investment falls bellow the maintenance margin.

In this problem, the production costs for 5,000 bushels are given by:

$Margin = Price*units -Cost\\\ 1,500=\ 5.714*5000 - Cost\\Cost = \ 27,070$

The price per bushel that yields a margin of $1,100 is:

$\ 1,100=Price*5,000- \ 27,070\\Price =\ 5.634=563.4\ cents$

You will receive a margin call at a price of 563.4 cents per bushel.