Dairy Futures and Options Tutorial

Margin Accounts

|\2. Price Movements That May Cause Margin Calls| |. Type of Hedger |. Type of Movement | | Future Purchaser | Decrease | | Future Seller | Increase |

Assume that you are a dairy farmer and sell 1 Class III futures
contract on the CME to hedge 200,000 lbs. of next month’s production.
The following example shows the margin account that needs to be
established and maintained. Assume the broker requires $300/contract
as an initial margin and establishes a maintenance margin
of $200/contract. Remember the CME Class III contract is for 2,000 cwt.

Example of Margin Account Changes
Date Futures Transaction Price ($/cwt) Contract Value Change Account Balance Margin Call
Oct. 5 Sell Oct. Class III 13.50 - $300 $0
Oct. 6 Hold 13.40 -$200 $300 – (-$200) = $500 $0
Oct. 7 Hold 13.45 +$100 $500 – $100 = $400 $0
Oct. 8 Hold 13.55 +$200 $400 – $200 = $200 $0
Oct. 9 Hold 13.60 +$100 $200 – $100 = $100 $200
Oct. 12 Hold 13.55 -$100 $300 – (-$100) = $400 $0
Continue with account until either you lift your hedge or it is cash settled