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Derivative Instrument and Market Features: practice question

Derivatives · Derivative Instrument and Market Features · Question ID deriv-h01-3

A trader goes long one gasoline futures contract at $2.4600 per gallon; the contract size is 42,000 gallons. The initial margin is $5,800 and the maintenance margin is $4,350. Over the next two trading days the contract settles at $2.4350 and then $2.4075 per gallon. The variation margin the trader must deposit at the end of Day 2 is closest to:

  1. $1,155
  2. $2,205
  3. $1,455
Show answer and explanation

Correct answer: B

Working: Day 1 loss = (2.4600 − 2.4350) × 42,000 = $1,050 → balance = 5,800 − 1,050 = $4,750 (above maintenance, no call). Day 2 loss = (2.4350 − 2.4075) × 42,000 = $1,155 → balance = 4,750 − 1,155 = $3,595, below the $4,350 maintenance margin. Variation margin restores the initial margin: 5,800 − 3,595 = $2,205.

Explanation: B is correct. After the Day 2 settlement the balance is $3,595, below the $4,350 maintenance threshold, and a margin call requires depositing enough to restore the account to the initial margin of $5,800, i.e., $2,205. A is incorrect because $1,155 merely replaces the second day's loss, leaving the balance at $4,750 — below the initial margin the call must restore. C is incorrect because $1,455 (4,350 − 3,595) only tops the account back up to the maintenance margin; calls restore the initial margin, not the maintenance level.

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Original, unofficial practice material; not a CFA Institute question.