Question

a. Turn to Figure 17.1 and locate the contract on the Standard & Poor’s 500 Index. If the margin requirement is 10% of the futures price times the multiplier of $250, how much must you deposit with your broker to trade the September contract?

b. If the September futures price were to increase to 1,200, what percentage return would you earn on your net investment if you entered the long side of the contract at the price shown in the figure?

c. If the September futures price falls by 1%, what is the percentage gain or loss on your net investment?

Short answer

Answer

a. $29,140.00

b. 29.51%

c. Loss of 10%

Step-by-step solution

Calculation of required deposit

Future’s price = $1,165.60

Margin requirement = 10%

Multiplier = $250

Margin = $1,165.60 x $250 x 0.10 = $29,140.00

Calculation of total return

Future price rises to = $1200

Total return = ($1,200 - $1,165.60) x $250 = $34.4 x $250 = $8,600

Percentage return = $8,600 / $29,140 = 0.2951 = 29.51%

Calculation of percentage loss

Total loss =[$1,165.6 x (1 - 0.01)]- $1,165.6 x $250 = -$2,914

Percentage loss = Total loss / Total price

= -2,914$ / $29,140

= 10% loss