Question

A trader buys two long July futures contracts on orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $$\$ 6,000$$ per contract, and the maintenance margin is $$\$ 4,500$$ per contract. What price change would lead to a margin call? Under what circumstances could $$\$ 2,000$$ be withdrawn from the margin account? There is a margin call if $$\$ 1,500$$ is lost on one contract. This happens if the futures price of orange juice falls by 10 cents to 150 cents per lb. $$\$ 2,000$$ can be withdrawn from the margin account if there is a gain on one contract of $$\$ 1,000$$. This will happen if the futures price rises by 6.67 cents to 166.67 cents per lb.

   A trader buys two long July futures contracts on orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $$\$ 6,000$$ per contract, and the maintenance margin is $$\$ 4,500$$ per contract. What price change would lead to a margin call? Under what circumstances could $$\$ 2,000$$ be withdrawn from the margin account? There is a margin call if $$\$ 1,500$$ is lost on one contract. This happens if the futures price of orange juice falls by 10 cents to 150 cents per lb. $$\$ 2,000$$ can be withdrawn from the margin account if there is a gain on one contract of $$\$ 1,000$$. This will happen if the futures price rises by 6.67 cents to 166.67 cents per lb.
 
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Options, Futures, and Other Derivatives - Solution Manual
Options, Futures, and Other Derivatives - Solution Manual
JOHN C HULL 7th Edition
Chapter 2, Problem 11 ↓

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The trader buys two long July futures contracts on orange juice, with each contract being for the delivery of 15,000 pounds. This means the trader has a total of 30,000 pounds of orange juice futures.  Show more…

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A trader buys two long July futures contracts on orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $$\$ 6,000$$ per contract, and the maintenance margin is $$\$ 4,500$$ per contract. What price change would lead to a margin call? Under what circumstances could $$\$ 2,000$$ be withdrawn from the margin account? There is a margin call if $$\$ 1,500$$ is lost on one contract. This happens if the futures price of orange juice falls by 10 cents to 150 cents per lb. $$\$ 2,000$$ can be withdrawn from the margin account if there is a gain on one contract of $$\$ 1,000$$. This will happen if the futures price rises by 6.67 cents to 166.67 cents per lb.
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Key Concepts

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Profit and Loss in Futures Trading
Profit and loss calculations in futures trading are based on the price movement of the underlying asset. The gain or loss is determined by the difference between the entry price and the current market price, multiplied by the contract size, which reflects the trading position’s sensitivity to price changes.
Margin Call
A margin call is a broker’s demand for additional funds when the equity in a margin account falls below the maintenance margin. This action is taken to restore the account to the required level, thereby mitigating the risk of further losses.
Maintenance Margin
Maintenance margin is the minimum level of equity that must be maintained in a trader's margin account after a position is opened. If the account balance falls below this level due to adverse price movements, a margin call is triggered.
Excess Margin Withdrawal
Excess margin withdrawal refers to the process of removing funds from a margin account when there is a surplus above the required initial and maintenance margin levels. This situation occurs when there are unrealized gains, and the account balance exceeds the minimum requirements, allowing the trader to withdraw the excess funds.
Margin Requirements
Margin requirements are the funds that a trader must deposit with a broker to open and maintain a futures position. These requirements help ensure that traders can cover potential losses and financially fulfill their contract obligations.
Futures Contracts
Futures contracts are standardized agreements to buy or sell an asset at a predetermined price at a specific time. They serve as a vital tool for hedging risk and speculating on price movements in various markets, such as commodities, currencies, and indices.
Initial Margin
The initial margin is the amount of money that must be deposited by a trader when entering a futures position. It is set to cover potential losses during the early stages of a trade and serves as a performance bond to manage risk.

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A trader buys two July futures contracts on frozen orange juice. Each contract is for the delivery of 15,000 pounds. The current futures price is 160 cents per pound, the initial margin is $6,000 per contract, and the maintenance margin is $4,500 per contract. What price change would lead to a margin call? Under what circumstances could $2,000 be withdrawn from the margin account? Please explain each step.

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