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Consider a situation wherein a farmer takes a short position in 4 wheat futures contracts. It is done in order to hedge against the
Consider a situation wherein a farmer takes a short position in 4 wheat futures contracts. It is done in order to hedge against the trend of falling commodity prices in the current markets. Each contract represents 5,000 bushels of wheat. Thus, the farmer is hedging against a price decline on 20,000 bushels of wheat. We suppose that the current futures price is $8.9510 per bushel. The amount that must be deposited at the time the contract is entered into is known as the initial margin which is equivalent to $3,630 per contract. The maintenance margin is $3,000 per contract. At the end of each trading day, the margin account is adjusted to reflect the investor's gain or loss. Based on the information given, complete the table below: Trade Settlement Daily gain (5) Cumulative gain Margin account Margin call (5) Price (S) Price (S) (5) balance (S) 8.9510 Day 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 8.9550 8.9530 8.9510 8.9480 8.9450 8.9490 8.9510 8.9550 8.9480 8.9470 8.9420 8.9460 8.9490 8.9520 Hint: Calculate the maintenance margin and Initial margin Maintenance margin- Initial margin-
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