Peter Ng is a wealthy speculator who believes that oil prices will fall over the next three months. Oil futures are quoted with the following details: • Futures price for 3 month delivery = $68.20 per barrel. • Contract size = 1,000 barrels. • Tick size = 1 cent per barrel. • Initial margin = 10% of contract. Peter decides to set his level of speculation at 10 contracts. Required: Calculate Peter’s initial margin.
As I explain in my free lectures, the initial margin is the deposit Peter has to pay when starting a futures deal. When the deal ends, he gets back the deposit together with any gain on the futures or less any loss.
Here, the margin is 10% of the total contract value (10 contracts of 1,000 barrels at 68.20 per barrel).