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FRM Part I · FRM Exam Part I · Introduction to Derivatives

A hedger is long 10 exchange-traded futures contracts, each on 5,000 units. The futures price is 80.00 at initiation. It settles at 78.40 on day 1, 79.10 on day 2, and 81.30 on day 3. Ignoring interest, what is the cumulative variation margin cash flow to the hedger after day 3, and what is the largest cumulative cash balance deficit reached versus initiation?

The long position of 50,000 units gains (81.30 - 80.00) x 50,000 = 65,000 in total. Cumulative flows were -80,000 after day 1, -45,000 after day 2, and +65,000 after day 3, so the largest cumulative deficit was 80,000 on day 1.

  1. AReceived 65,000 in total; largest cumulative deficit 80,000 on day 1Correct
  2. BReceived 65,000 in total; largest cumulative deficit 45,000 on day 2
  3. CReceived 130,000 in total; largest cumulative deficit 80,000 on day 1
  4. DPaid 65,000 in total; largest cumulative deficit 80,000 on day 1

Explanation

Position is 50,000 units. Day 1: (78.40-80)=-1.60 x 50,000 = -80,000. Day 2: +0.70 x 50,000 = +35,000, cumulative -45,000. Day 3: +2.20 x 50,000 = +110,000, cumulative +65,000. Check: (81.30-80)x50,000 = 65,000. Largest deficit is 80,000 on day 1; the 45,000 option picks day 2.

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