Margin requirement is a key fe

Margin requirement is a key feature of traded derivative contracts. Suppose Gold futures for July 2016 delivery is currently trading at $1,230. The contract size is 100 ounces per contract. The initial margin is $4,950 and the maintenance margin is $4,500. It is 17/05/2016, and you “go long in Gold JUL 2016 Futures” at $1,230 per oz. Complete the margin account below:

Date Futures Price ($/oz) Gain/Loss Cumulative Gain/Loss Margin Account ($) Margin Call
17/05/16 1,230 4,950
18/05/16 1,226
19/05/16 1,220
20/05/16 1,215
23/05/16 1,220
24/05/16 1,225
25/05/16 1,230
25/05/16 1,240

b)Suppose six months from now (i.e. in November), GNPC, an oil exploration company, expects to produce 100,000 barrels of crude oil. The current price of oil is $40 per barrel and the futures price for November delivery is $45 per barrel. The contract size is 1,000 barrels per contract. Illustrate how GNPC can use the futures market to manage its oil price risk. In your answer please indicate the position to be taken in the futures market and the number of contracts required.

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