Question 3 (40 marks)

  • June 25, 2021

Question 3 (40 marks) Margin calls and liquidity risk: A commodity futures trader enters into short position in 10 contracts in gold at futures price of $276.50 per oz. The size of one futures contract is 100 oz. The initial margin per contract is $1,500, and the maintenance margin per contract is $1, 100. ()What is the initial size of the margin account? (2 marks) (b)Suppose that the trader has access to as much liquidity as he desires to satisfy any margin calls. Ignore any interest rate effects(rate of interest is zero for simplicity). Suppose the futures settlement price on the next five days is:$278.00 per oz.$281.00 per oz.$285.00 per oz.$282.50 per oz.$276.00 per oz. What is the balance in the margin account at the end of each day? (day 0 (18 marks) to day 5) On which days does a margin call occur? (2 marks) Assume that when a margin call occurs, the account is topped back to its (6 marks) original level the initial size of the margin account). What are the trader’s total gains or losses on the fifth day when he closes out his position? (c)Suppose now that the trader is limited in his access to liquidity to a line of credit of size $2000. A line of credit is a source of funds that can readily be tapped at the borrower’s discretion. Assume again that interest costs are zero. What is the balance in the margin account at the end of each day? (3 marks) On which days does a margin call occur? (2 marks) Assume that when a margin call occurs the account is topped back to its original level if there is sufficient liquidity. Every margin call draws down

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