Ace serves as a futures commission merchant to assist several of its commodity trading adviser (CTA) clients to clear and settle their futures margin positions with the futures exchange. Ace is reviewing the copper futures market for a CTA client considering a long copper futures position for the first time. Details of the copper futures market are as follows:
CME Copper Futures Contract Specifications
| Contract Maturities: | Monthly [from 1 month to 15 months] |
| Contract Size: | 25,000 pounds |
| Delivery Type: | Cash settled |
| Price Quotation: | $ per pound |
| Initial Margin: | $10,000 per contract |
| Maintenance Margin: | $6,000 per contract |
| Final Maturity: | Last CME business day of contract month |
| Daily Settlement: | CME Trading Operations calculates daily settlement values based on its published procedures |
Today’s copper spot price is $4.25 per pound, and the constant risk-free rate is 1.875%. Each contract has a $10 storage cost payable at the end of the month. Which of the following statements best characterizes the margin exposure profile of Ace’s CTA client if it enters a one-month copper futures contract?
- The CTA will be expected to post $10,000 initial margin and would receive a margin call if the copper futures price were to immediately fall below $4.10 per pound or below a price of $102,425 per contract.
- The CTA would be expected to post $10,000 in initial margin and would receive a margin call at any time over the life of the contract if the copper futures price were to immediately fall below $3.86 per pound or below a price of $96,425 per contract.
- The CTA will be expected to post $10,000 initial margin, but we cannot determine the exact futures price at which a margin call will occur as the futures MTM is settled each day and the contract value resets to zero.
2 Answers