The buyer and the seller of a future on Monday with an underlying value of 90,000 are both required to provide an initial margin of 10 per cent, assuming that counterparties have to keep all of the initial margin permanently as a buffer (i.e. the maintenance margin will always be equal to the initial margin).

a. Calculate the variation margins and the accumulated profit/loss if the price of the underlying asset changes as presented in the table. (i.e. Write your answers over the lines provided in the table).

b) Calculate the return and the % return for the holding period (Monday to Friday) for the seller of this future based on the above information.

c) Explain what is meant by gearing returns with reference to this example. (Hint: gearing has the same meaning as leverage, note how the returns in the Imaginationum are amplified in the futures contract and comment on it.)

Monday

Tuesday

Wednesday

Thursday

Friday

Value of Future

90 000

93 200

95 500

91 800

86 900

Buyer's Position

Initial Margin

_______

Variation Margin

0

_______

_______

_______

_______

Accumulated Profit (Loss)

0

_______

_______

_______

_______

Seller's Position

Initial Margin

_______

Variation Margin

0

_______

_______

_______

_______

Accumulated Profit (Loss)

0

_______

_______

_______

_______