CMFAS M9A Understanding Derivatives question: gold futures contract with an initial margin of S$2,500 and a maintenance margin

CMFAS M9AUnderstanding Derivatives

An investor holds a gold futures contract with an initial margin of S$2,500 and a maintenance margin of S$2,000. The contract falls in value by S$1,000, cutting the margin account to S$1,500. What variation margin will the broker call for?

A S$500, to restore the account to the maintenance margin level
B S$1,000, to restore the account to the initial margin level
C S$1,500, equal to the remaining account balance
D Nil, because the account is still above the maintenance margin

Show the answer and explanation

Answer: B. S$1,000, to restore the account to the initial margin level

The account (S$1,500) has fallen below the maintenance margin (S$2,000), triggering a margin call. The variation margin is always the amount needed to restore the account to the initial margin level — here S$2,500 − S$1,500 = S$1,000.

Common mistake

The top-up restores the account to the initial margin (S$2,500), not merely back up to the maintenance level.

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