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Futures- Margin Account; DJIA

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1) The worlds most actively traded commodity is crude oil. New York Mercantile Exchange (NYMEX) is the largest market for future oil contracts, both light sweet and brent. Contracts are traded in units of 1000 barrels. Currently, non-member initial margin is $4,725 per contract. The Maintenance requirement is $3,500. Suppose you long 10 September 05 contracts with the exercise price of $62.25 per barrel.

a) suppose price of oil in the spot market drops to $60.25. What will be the balance of your margin account?
b) Suppose price of oil jumps to $65.10. What will be the balance of your margin account?
c) What price triggers a margin call?
d) What price triggers a $20,000 margin call?

2)Assume DJIA records the changes in prices of 4 stocks. Assume initially the prices of these stocks are $40. $20, $60. and $80. What is the DJIA? Suppose the 4th company declares a 4-for-1 stock splits. If after the split the closing prices of stocks happen to be $39, $21.50 $63 and $19 respectively, what is the new DJIA? Now assume that the first two companies merge. The editorial board of WSJ adds a new corporation to the list. This company's share closes t $20 the day before it is added to DJIA. If the closing price of stocks of the 4 companies are $50,$61,$19, $22, what is the new DJIA?

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Solution Summary

Answer to two questions:
1) Futures- Balance in the Margin Account, Margin Call
2) DJIA- calculation of index incorporating stock split, merger and addition of a new stock

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1) The worlds most actively traded commodity is crude oil. New York Mercantile Exchange (NYMEX) is the largest market for future oil contracts, both light sweet and brent. Contracts are traded in units of 1000 barrels. Currently, non-member initial margin is $4,725 per contract. The Maintenance requirement is $3,500. Suppose you long 10 September 05 contracts with the exercise price of $62.25 per barrel.

Number of contracts = 10
Size of each contract= 1000 barrels

a) suppose price of oil in the spot market drops to $60.25. What will be the balance of your margin account?

Number of contracts = 10
Size of each contract= 1000 barrels

Initial Margin = $4,725 per contract
Exercise price= $62.25 per barrel
If the price falls below the exercise price there is a loss
Price= $60.25
Loss per barrel= $2.00 =62.25-60.25
Loss per contract= $2,000 =1000x2
Margin account per contract= $2,725 =4725-2000
Balance in margin account since there are 10 contracts= $27,250 =10x2725

Answer: Balance in margin account= $27,250

Note: Actually the price of future contract should change for changes in balance account. Spot price changes will cause ...

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