Financial Markets and Products, Chapter 5, EOC 5.15 and 5.16

[AUola2165]

Question 5.15:
A trader contacts a broker to enter into a futures contract to sell 5,000 bushels of wheat for 600 cents per bushel. The initial margin is USD 30,000, and the maintenance margin is USD 20,000. Under what circumstance is the trader required to provide more margin? How much mar-gin is required? Under what circumstances can USD 500 be withdrawn from the margin account?

Answer:
The trader is required to provide more margin if more than USD 1,000 is lost from the margin account. This will happen if the price of wheat falls by more than 20 cents because variation margin will then have reduced the margin balance by more than 5,000 * 20 cents = USD 1,000. The trader is required to bring the balance in the margin account up to the initial margin level of USD 30,000. USD 500 can be withdrawn
from the margin account if the price rises by 10 cents or more (5,000 * 610 cents = USD 30,500, which is USD 500 more than the required initial margin of USD 30,000).

Question 5.16:
A U.S. trader sells 500 put options. The option price is USD 3, the strike price is USD 31, and the stock price is USD 30. What is the margin requirement?

Answer:
The margin per option in USD is max(3 + 0.2 * 30 - 1, 3 + 0.1 * 31) = 8
The total margin requirement is therefore USD 4,000.


I am a bit confused by these questions. How are we supposed to know what margin requirements are supposed to be used? Are these some actual percentages we should learn by heard?
Secondly, the initial margin amount in 5.15 answer is 30,000USD...when the futures contracts nominal is 5,000bushels x 600 cents = 30,000USD. Is this an error or where does this h*** of a margin requirement come from? Or am I missing something here haha?

 

[Sixcarbs]

Question 5.15:
A trader contacts a broker to enter into a futures contract to sell 5,000 bushels of wheat for 600 cents per bushel. The initial margin is USD 30,000, and the maintenance margin is USD 20,000. Under what circumstance is the trader required to provide more margin? How much mar-gin is required? Under what circumstances can USD 500 be withdrawn from the margin account?

Answer:
The trader is required to provide more margin if more than USD 1,000 is lost from the margin account. This will happen if the price of wheat falls by more than 20 cents because variation margin will then have reduced the margin balance by more than 5,000 * 20 cents = USD 1,000. The trader is required to bring the balance in the margin account up to the initial margin level of USD 30,000. USD 500 can be withdrawn
from the margin account if the price rises by 10 cents or more (5,000 * 610 cents = USD 30,500, which is USD 500 more than the required initial margin of USD 30,000).

Question 5.16:
A U.S. trader sells 500 put options. The option price is USD 3, the strike price is USD 31, and the stock price is USD 30. What is the margin requirement?

Answer:
The margin per option in USD is max(3 + 0.2 * 30 - 1, 3 + 0.1 * 31) = 8
The total margin requirement is therefore USD 4,000.


I am a bit confused by these questions. How are we supposed to know what margin requirements are supposed to be used? Are these some actual percentages we should learn by heard?
Secondly, the initial margin amount in 5.15 answer is 30,000USD...when the futures contracts nominal is 5,000bushels x 600 cents = 30,000USD. Is this an error or where does this h*** of a margin requirement come from? Or am I missing something here haha?

What is the source of these questions? 5.15 is a mess. The initial margin can not be $30,000, you are correct, and if it was, according to the question the trader would need to lose $10,000, not $1,000 to incur a margin call.

5.16 is a formula from GARP's book, Financial Markets and Products, page 62. Yes, you should know these formulas.

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For a short put option, the margin requirement is the greater of:

• 100% of the value of the option plus 20% of the underlying
stock price less the amount (if any) that the option is out-of-the-money, or

• 100% of the value of the option plus 10% of the strike price.

 

[enjofaes]

5.15 is somewhat similar to https://forum.bionicturtle.com/threads/hull-02-29.6330/