P1.T3.403. Futures margin and delivery

[Nicole Seaman]

AIMs: Explain original and variation margin, daily settlement, the guaranty deposit, and the clearing process. Describe the mechanics of futures delivery and the roles of the clearinghouse, buyers, and sellers in this process. Explain the role of futures commission merchants, introducing brokers, account executives, commodity trading advisors, commodity pool operators, and customers

Questions:

403.1. Suppose you enter into a short futures contract to sell December copper for $3.1980 per pound. The contract size is 25,000 pounds; see http://www.cmegroup.com/trading/metals/base/copper_contract_specifications.html. Per the current contract specifications, the initial margin is $3,300.00 and the maintenance margin is $3,000.00. What change in the futures price will lead to a margin call?

a. $0.0060 decrease to $3.1920
b. $0.0120 decrease to $3.1860
c. $0.0060 increase to $3.2040
d. $0.0120 increase to $3.2100

403.2. Each of the following is true about futures delivery EXCEPT which is not true?

a. The seller (short position) initiates delivery
b. When the seller is ready to deliver, he or she instructs the broker to submit a notice of intention to deliver (which contains the essential facts regarding delivery) to the clearinghouse
c. The buyer (long position) determines the day, location and grade of the delivered commodity
d. A speculator who is long futures during the delivery period is liable for delivery just as a hedger would be

403.3. Each of the following is true about key roles associated with futures trading, EXCEPT which is not true?

a. A futures commission merchant (FCM) is the intermediary between pubic customers and the exchanges; and is the only entity outside the futures clearinghouse that can hold customer funds
b. An introducing broker (IB) services customer accounts; but an IB cannot accept funds from its customers
c. A commodity trading advisor (CTA) is an individual or organization who advises, for compensation, others on the value or advisability of trading futures or options; a CTA is permitted to trade individually managed accounts
d. A commodity pool operator (CPO) manages the warehouses that store commodities and determines the storage costs of commodities

Answers here:

• In forum

 

[Roshan Ramdas]

Please put these questions under the study planner.
Thank you,
Roshan

 

[Alex_1]

But they are already there?
https://learn.bionicturtle.com/frm-...estion-set-futures-and-options-chapters-1-2-7
Thanks.

 

[Roshan Ramdas]

Sorry,...overlooked this bunch of questions in the PDF doc that is there on the study planner.
Thank you,
Roshan

 

[Nicole Seaman]

@Roshan Ramdas,

Please note that all daily questions that we post on the forum coincide with specific readings and they are always published in the study planner once we have a full practice question set to publish.

Thank you,

Nicole

 

[David Harper CFA FRM]

Thank you @Alex_1 that is nice of you to share the pointer!

 

[JDGutzmann]

Hello,
I have difficulties understanding why the change in price has to be added to the original price and not subtracted. I believe it has to do with the short position, but can anyone help?
Thank you very much!
Johannes

 

[Roshan Ramdas]

Hello,
I have difficulties understanding why the change in price has to be added to the original price and not subtracted. I believe it has to do with the short position, but can anyone help?
Thank you very much!
Johannes

Hello,

The question talks about the circumstances under which a margin call will be made to the short position holder.
If I enter into a "sell" futures trade at $100 right now and if the end of day price had to fall to $95, that would result in me (the short position holder) gaining $5. Reason - I get to sell at $100, when the contract trades at $95 in the market.
The counterpart lands up taking a loss and consequently a margin call.

If the end of day price on the other hand climbs to $105, then that would result in a loss for my short position. Reason - I get to sell at $100, when the contract trades at $105 in the market.

As a result, it is a price rise that hurts a short position holder and results in a potential margin call, where the IM balance has declined below the maintenance margin threshold.

Hope this helps.

 

[JDGutzmann]

Hello Roshan,
thank you very much for your quick answer. That helped a lot!
Johannes

 

[Praveen_India]

Hi David/Forum,

Kindly help me understand the ''Daily Gain/Loss'' in the attachment. This is the example taken from "Hull, Chapter 2: Mechanics of Futures Markets", R12.P1.T3.Hull_v3. Page no 21.

When futures price decreases from 597 to 596 (from 5th July to 6th July) total loss would be, 1$ per ounce*200 ounce=200$. However loss has been shown as 180. And in subsequent calculations also something is happening that I am unable to understand.

Kindly explain.

Thanks,
Praveen