Imagine it is July 10, 2020. A UK company has to pay an invoice of US$6.65 million on August 26, 2020. They are worried that exchange rate fluctuations could increase the cost in pounds sterling and therefore seek to effectively correct the cost in sterling using exchange-traded futures. . The current spot exchange rate is $/£1.71110.

£/$ futures, where the contract size is denominated in £, are available on the CME Europe exchange:

September expiration –1.71035

December expiration –1.70865

The contract size is £100,000 and the futures are quoted in US dollars per pound sterling. The contract specification for the futures states that the tick size is $0.00001 and the tick value is $1.

Result on August 26:

On August 26, the following was true: Spot rate: $/£ 1.65770

September Futures Price: $/£1.65750

In the above scenario, the CME contract specification for £/$ futures states that an initial margin of $1,375 per contract is required. The maintenance margin is $1,250 per contract. The settlement prices of this future are:

Settlement price on July 11 (Friday) 1.70925

Settlement price on July 14 (Monday) 1.70805

Settlement price on July 15 (Tuesday) 1.71350

Required:

1. Determine any margin calls and reloads required

2. Calculate the total amount of initial margin required

3. Calculate the total amount of the maintenance margin

4. Calculate the profit/loss of the futures contract by making the market

5. Determine the margin balance