Explain How High Do The Maintenance Margin Levels For Oil And Gold
Section (A)
Q: How high do the maintenance margin levels for oil and gold have to be set so that there is a 1% chance that an investor with a balance slightly above the maintenance margin level on a particular day has a negative balance 2 days later? How high do they have to be for a 0.1% chance? Assume daily price changes are normally distributed with mean zero. Explain why the exchange might be interested in this calculation.
Answer:
Required Maintenance margin level for crude:
Based on the calculation from the data, the standard deviation of daily changes in price of the crude oil futures contract is $0.31 per barrel or $310 per contract.
If there is a 1% risk, the z statistic for a level of significance of 1% is 2.33.
With 1% chance that …show more content…
With 0.1% chance that an investor with a balance slightly above the maintenance margin level on a particular day has a negative balance 2 days later, the required maintenance margin =$310*√2*3.09 = $1,355
Required maintenance margin for Gold:
Based on the calculation from the data, the standard deviation of daily changes in price of the gold futures contract is $2.77 per ounce or $277 per contract.
If there is a 1% risk, the z statistic for a level of significance of 1% is 2.33.
With 1% chance that an investor with a balance slightly above the maintenance margin level on a particular day has a negative balance 2 days later, the required maintenance margin level for gold =$277*√2*2.33 = …show more content…
Margin balances in excess of the initial margin are withdrawn.
Use the maintenance margin you calculated in part (a) for a 1% risk level and assume that the maintenance margin is 75% of the initial margin. Calculate the number of margin calls and the number of times the investor has a negative margin balance. Assume that all margin calls are met in your calculations. Repeat the calculations for an investor who starts with a short position in the gold contract.
Answer:
There are 93 margin calls when the initial margin is set at $1217. There are 9 times out of 823 days where the investor has a negative margin balance that will lead to walk away. In the case of risk level in 0.1%, there are 6 times when the gold investor might walk away.
The calculation for crude oil with a 1% risk has been used. The formulas used are shown as under:
Initial margin is in cell A1
Maintenance margin in cell A2.
Change in the oil futures price in column C = today’s price – previous day’s price
Margin balance at days close in column
Q: How high do the maintenance margin levels for oil and gold have to be set so that there is a 1% chance that an investor with a balance slightly above the maintenance margin level on a particular day has a negative balance 2 days later? How high do they have to be for a 0.1% chance? Assume daily price changes are normally distributed with mean zero. Explain why the exchange might be interested in this calculation.
Answer:
Required Maintenance margin level for crude:
Based on the calculation from the data, the standard deviation of daily changes in price of the crude oil futures contract is $0.31 per barrel or $310 per contract.
If there is a 1% risk, the z statistic for a level of significance of 1% is 2.33.
With 1% chance that …show more content…
With 0.1% chance that an investor with a balance slightly above the maintenance margin level on a particular day has a negative balance 2 days later, the required maintenance margin =$310*√2*3.09 = $1,355
Required maintenance margin for Gold:
Based on the calculation from the data, the standard deviation of daily changes in price of the gold futures contract is $2.77 per ounce or $277 per contract.
If there is a 1% risk, the z statistic for a level of significance of 1% is 2.33.
With 1% chance that an investor with a balance slightly above the maintenance margin level on a particular day has a negative balance 2 days later, the required maintenance margin level for gold =$277*√2*2.33 = …show more content…
Margin balances in excess of the initial margin are withdrawn.
Use the maintenance margin you calculated in part (a) for a 1% risk level and assume that the maintenance margin is 75% of the initial margin. Calculate the number of margin calls and the number of times the investor has a negative margin balance. Assume that all margin calls are met in your calculations. Repeat the calculations for an investor who starts with a short position in the gold contract.
Answer:
There are 93 margin calls when the initial margin is set at $1217. There are 9 times out of 823 days where the investor has a negative margin balance that will lead to walk away. In the case of risk level in 0.1%, there are 6 times when the gold investor might walk away.
The calculation for crude oil with a 1% risk has been used. The formulas used are shown as under:
Initial margin is in cell A1
Maintenance margin in cell A2.
Change in the oil futures price in column C = today’s price – previous day’s price
Margin balance at days close in column