Answer to Question #223901 in Finance for Collins

Question

ABC Company Ltd purchased 5000 cocoa futures contract at a price of $150
per contract. As part of the contract, ABC was required to deposit $10 per
contract initially in their account with the maintenance margin set at $5 per
contract. If the price per contract falls to $142 overnight, what action will the
exchange require ABC to undertake?

Answer 1

Computation of the compensation amount:

$Compensation\space Amount=(Initial\space Margin+Maintenance\space Margin)×Number\space of\space Future \space Contract\\=(\$10+\$5)×5,000\\=\$15×5,000\\=\$75,000$

The company will not exercise the futures contract as the price per contract falls to $142 from $150 which leads to the loss for the company. Thus, the company only has to pay a compensation amount of $75,000.