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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.What is initial margin and how is it calulated?
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).
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