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Q19I

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Essentials Of Investments
Found in: Page 590
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

The margin requirement on the S&P 500 futures contract is 10%, and the stock index is currently 1,200. Each contract has a multiplier of $250. How much margin must be put up for each contract sold? If the futures price falls by 1% to 1,188, what will happen to the margin account of an investor who holds one contract? What will be the investor’s percentage return based on the amount put up as margin?

Answer

Cash in margin account = $27,000

Percentage return = -10%

See the step by step solution

Step by Step Solution

Step 1: Calculation of margin for each contract

The dollar value of the index = $250 x 1200 = $300,000

Required Margin = Dollar Value of Index x Margin Rate

= $300,000 x 10%

=$30,000

Step 2: Calculation of cash in margin account

Futures price after the fall = $1188 hence the decline = $12

Decrease in margin account = $12 x $250 = $3,000

Therefore, the cash in margin account = $30,000 - $3000 = $27,000

Step 3: Calculation of investor’s return

Percentage return = Decrease in Margin Account/Margin Paid

=-$3,000 / $30,000

= -10%

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