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FRM Part I · FRM Exam Part I · Futures Markets

An investor buys one futures contract on 1,000 units of a commodity at 80.00. Initial margin is 4,000 and maintenance margin is 3,000. The settlement prices over the next three days are 79.00, 77.50 and 78.00. The account is marked to market daily and the investor withdraws no funds. On which day, if any, is the first margin call issued, and what is the variation margin required to restore the initial margin?

A margin call is issued on Day 2, requiring 2,500. After a cumulative loss of 2,500 at a price of 77.50, the balance is 1,500, below the 3,000 maintenance level. Variation margin must bring the account back to the 4,000 initial margin, so 4,000 minus 1,500 equals 2,500.

  1. ADay 2, variation margin of 1,500 to restore 4,000
  2. BDay 2, variation margin of 2,500 to restore 4,000Correct
  3. CDay 3, variation margin of 1,000
  4. DNo margin call is issued

Explanation

Day 1: loss 1,000, balance 3,000 (not below 3,000). Day 2: price 77.50, cumulative loss 2,500, balance 1,500, below 3,000, so a call is issued. Restoring to 4,000 needs 4,000 - 1,500 = 2,500. Day 3 balance would be 2,000 had no deposit been made, but the call already occurred on Day 2. The 1,500 option confuses the balance with the amount needed.

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