Question

On day 1 an investor entered into a futures contract to buy £62,500 at $1.45/£1. The initial performance bond was 2 percent of the USD contract value. The maintenance performance bond was 90 percent of the initial performance bond. Below what settle price will the investor receive a margin call?

Multiple Choice

• $1.4239/£1

• None of the options.

• $1.4210/£1

• $1.4471/£1

• $1.4720/£1

Answer 1

The correct answer is option of $1.4471/£1 and is computed as shown below:

Value of Initial performance bond is computed as shown below:

= £62,500 x $ 1.45 x 2%

= $ 1,812.50

Value of Maintenance performance bond is computed as shown below:

= $ 1,812.50 x 90%

= $ 1,631.25

To get a margin call we need to incur loss of

= $ 1,812.50 - $ 1,631.25

= $ 181.25

This loss will be incurred if the rate falls to $1.4471/£1 as shown

= ($ 1.4471/£1 - $ 1.45/£1) x £ 62,500

= $ 181.25

Hence the correct answer is option of $1.4471/£1

Feel free to ask in case of any query relating to this question