Tim owns a gold mine in Sovereign Hill and sells gold to a jewelry factory. On 1May, Tim shorts two of the 1 June gold futures contracts at $1740 per ounce. Each contract covers 10 ounces of gold. At the end of the first day, the closing futures price is $1730 per ounce. The future prices for the following days are provided in the table. (Required: Show your work step by step. For calculation questions, answers without a working process are not acceptable. This rule is applied to all calculation questions.)

(a) Tim's broker requires him to deposit 20% of the total contract value as the initial margin. The maintenance margin is 60% of the initial margin. How much are the initial margin and the maintenance margin? (2 marks)

(b) Tim feels the margin requirements are too high and finds another broker who requires him to deposit $3480 as the initial margin for two futures. The maintenance margin is $2088 for two futures. Assume Tim does not withdraw any excess from his margin account between 1 and 10 May. Fill in the information (i.e., daily gain/loss ($), cumulative gain/loss ($), margin balance before margin call/withdraw ($), and margin call/withdraw ($)) in Rows 1-3 of the following table. Show how you calculate each filled number. (4 marks)

Transcribed Image Text:

Row Day Trade Price ($)Settle Price ($) Daily Gain/Loss ($) Cumulative Gain/Loss ($) Margin Balance Before Margin Call/Withdraw ($) Margin Call/Withdraw ($) 3480 0 1 May 1740 1 1 May 2 3 4 5 2 May 3 May 4-9 May 10 May 1730 1810 1795 1690 200 ******** ****** Row Day Trade Price ($)Settle Price ($) Daily Gain/Loss ($) Cumulative Gain/Loss ($) Margin Balance Before Margin Call/Withdraw ($) Margin Call/Withdraw ($) 3480 0 1 May 1740 1 1 May 2 3 4 5 2 May 3 May 4-9 May 10 May 1730 1810 1795 1690 200 ******** ******

Answer rating: 100% (QA)

a To calculate the initial margin and the maintenance margin we need to determine the total contract value Each futures contract covers 10 ounces of g... View the full answer