An investor expects the stock market to decline, but instead of selling the equity short, he decided to sell the stock index futures contract based on the XYZ stock exchange composite index. The index is currently 138 an

CS Professional · Capital Commodity and Money Market · PYQS · June 2016
An investor expects the stock market to decline, but instead of selling the equity short, he decided to sell the stock index futures contract based on the XYZ stock exchange composite index. The index is currently 138 and the contract has a value that is 500 times the amount of the index. The margin requirement is ₹3,500 and the maintenance margin requirement is ₹1,000. Based on the above, answer the following: (i) When the investor sells the contract, how much must he put-up?

Answer & Explanation:

Since the Margin requirement is ₹3,500, he needs to put up ₹3,500/-. In futures trading, the entire value of a contract need not be paid, rather a margin that is typically between 2 per cent and 10 per cent of the total value of the contract need to be paid while entering into the contract. It is part of the risk management system.

Topics: Derivatives

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