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Ace Limited is a financial intermediary active in both futures and forward markets. You have been hired as an investment consultant and asked to review Ace’s activities and answer the following questions.
Question
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?
A. 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.
B. 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.
C. 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.
full solution is provided by sir in live class.
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But the answer is C
can you share solution screenshot then?
I cannot paste the screenshot here but I’ll try to copy paste it