| Description |
<p>Ace serves as a futures commission merchant to assist several of its commodity
trading adviser (CTA) clients to clear and settle their futures margin positions
with the futures exchange. Ace is reviewing the copper futures market for a CTA
client considering a long copper futures position for the first time. Details of the
copper futures market are as follows:</p>
</br>
<table style="width:90%;text-align:left">
<caption>CME Copper Futures Contract Specifications</caption>
<tr><th>Contract Maturities:</th><td>Monthly [from 1 month to 15 months]</td></tr>
<tr><th>Contract Size:</th><td>25,000 pounds</td></tr>
<tr><th>Delivery Type:</th><td>Cash settled</td></tr>
<tr><th>Price Quotation:</th><td>$ per pound</td></tr>
<tr><th>Initial Margin:</th><td>$10,000 per contract</td></tr>
<tr><th>Maintenance Margin:</th><td>$6,000 per contract</td></tr>
<tr><th>Final Maturity:</th><td>Last CME business day of contract month</td></tr>
<tr><th>Daily Settlement:</th><td>CME Trading Operations calculates daily settlement values
based on its published procedures</td></tr>
</table>
</br>
<p>Today’s copper spot price is $4.25 per pound, and the constant risk-free rate is
1.875%. Each contract has a $10 storage cost payable at the end of the month.
Which of the following statements best characterizes the margin exposure profile
of Ace’s CTA client if it enters a one-month copper futures contract?</p> |