=+7 (Examination level) A buyer of a futures contract in Imaginationum with an underly-

ing value of £400,000 on 1 August is required to deliver an initial margin of 5 per cent to the clearing house. This margin must be maintained as each day the counter-

parties in the futures are marked to market.

Required a Display a table showing the variation margin required to be paid by this buyer and the accumulated profit/loss balance on her margin account in the eight days following the purchase of the future. (Assume that the maintenance margin is the same as the initial margin.)

Day 1

2 3 4 5 6 7 8 Value of Imaginationum 390 410 370 450 420 400 360 410

(£000s)

Explain what is meant by 'gearing returns' with reference to this example.

c Compare forwards and futures markets and explain the mutual coexistence of these two.