In this workout, we are asked to calculate the initial margin and variation margin payments required for a trade in Gold Futures where the counterparty has taken a long position and traded one contract only. For these Gold Futures, the contract size is a hundred ounces of gold per one contract and the initial margin requirements are $4,345 for initial margin and $3,950 for maintenance margin. The initial margin amount is straightforward. We only have one trade, so the $4,345 per contract is the amount that needs to be paid in. Moving onto variation margin, the first thing to calculate is the gain or loss made per contract. And here we can see that the Futures price at the end of the first day has increased by $1 per ounce of gold. But we need to multiply this by the fact that there are a hundred ounces of gold per contract, giving us a $100 gain at the end of the first day. This amount will be paid into our margin accounts by the clearing house, giving us a margin account. Before any variation, margin payments are $4,445. Since we have made this as a gain, we can take you out of our margin account, which will leave us with the variation margin payment being a negative payments of receipt, and leaving the margin account at the initial margin level, $4,345. To look at the gains and losses on day two, we only need to look at the movement from day one. So the Futures price closed day two down at 1,198. That is three points lower than it closed day one at $3 per ounce. And since there were a hundred ounces per contract, we will have suffered a loss on day two from the position at the end of day one of $300. This will be taken out of our margin account. So our margin account before any variation margin payments will take the initial margin amount, the amount from the end of day one, adjust for the loss of 300 that is taken out of our margin account, leaving us with $4,045 at the end of date two.

Do we need to make any variation margin payments here? While the $4,045 amount is greater than the maintenance margin level, which means that there is no requirement to make a variation margin payment at the end of day two which means that the margin account level at the end of day two will be the $4,045.

Moving to day three, again, we need to look at the movement and the price from day two, 1,198 to day three. We've suffered a further loss on our one contract. And for the gain or the loss, we need to look at the movement, again, during this day and adjust our margin account. So for day three, we've suffered a further loss of $13 per ounce of gold and there are a hundred ounces of gold in each contract. So I've lost a further 1,300 or $1,300 on day three. If we then adjust the margin account from the close of day two to the taking into account the loss suffered during day three, the margin account before any variation margin will be $2,745. This is now below the maintenance margin level of 3,950.

And as a result of that, we'll be obligated on day three to get our margin account back up to the initial margin level, $4,345.

From its level after the clearing house had taken out the day three loss which left us with only $2,745. So there's a requirement to pay on day three, $1,600, which amounts to the net of the loss suffered on day two and day three together. The net result of all of this is that by the end of day three, our margin account will be back up to the initial margin level.