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

A investor holds a long position in 20 futures contracts on an index, each with a multiplier of USD 50. The futures settlement price moves from 4,200 on Monday to 4,215 on Tuesday and to 4,190 on Wednesday. Which of the following correctly describes the investor's cumulative margin account cash flows through Wednesday's settlement?

The investor gains USD 15,000 on Tuesday and loses USD 25,000 on Wednesday, for a net loss of USD 10,000. Each index point is worth USD 1,000 across 20 contracts with a USD 50 multiplier, and daily settlement credits or debits the margin account accordingly.

  1. AGain of USD 15,000 on Tuesday, loss of USD 25,000 on Wednesday, net loss of USD 10,000Correct
  2. BGain of USD 15,000 on Tuesday, loss of USD 25,000 on Wednesday, net loss of USD 25,000
  3. CGain of USD 750 on Tuesday, loss of USD 1,250 on Wednesday, net loss of USD 500
  4. DLoss of USD 15,000 on Tuesday, gain of USD 25,000 on Wednesday, net gain of USD 10,000

Explanation

Tuesday: 15 points x 50 x 20 = 15,000 gain. Wednesday: 25 points x 50 x 20 = 25,000 loss. Net = -10,000, which equals (4,190-4,200) x 1,000. Option C omits the 20 contracts, and D reverses the signs for a long position.

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