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Question for the currency traders

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Not applicable
Say for example, I wanted to hedge a 2yr revenue stream of us$10,000 per month (for ease of calculation). I sell 2400 contracts at zar10 to the $. My initial margin will be 240k, which is the exact amount I deposit into the account. My question pertains to the maintenance margin. Assume I prepared to accept anything up until 11 ZAR to the $ in losses, when am I likely to get a margin call and how much will I need to avoid it?
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5 REPLIES 5
EkisDoep
Frequent Contributor
You will get a margin call immediately as the Rand starts moving weaker than R10 to the $.The amount will depend on how quick and how far it moves away from R10. Not sure about the exact amount. One can calculate that, the method is shown in the currency futures brochure. But for 240 contracts I believe you should keep at least R10 000 in that account. Sometimes it moves so quick and if you cannot transfer funds immediately, they might close some of your contracts.
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Not applicable
2400 contracts will cost you around R144000 initial margin, ( +-R600 per contract). If you deposit exactly R144000 the platform will for some reason not allow you to buy 2400 contracts, they keep some arb amount in reserve, say in this case around R2000. So you need to deposit around R146000 to be able to buy 2400 contracts. Approx 50% of that margin is used before they start to sell you out. So you have R72000 plus the arb R2000 = R74000 in reserve. 2400 contracts move by R2400 per 1 cent change in exchange rate. If you want to allow 100 cents movement(R10 to R11) you will need R2400*100 = R240000 in reserve. You already have R74000 so you need an extra R240000-R74000= 166000 in your account. Margin calls; If you do not top-up your account on a margin call, they will only sell you out a sufficient amount to cover your shortfall at that moment.
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Not applicable
Great answer, thanks. This hedging strategy is going to be easier than I originally thought!
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Preston
Super Contributor
@skaap, Sound like my CFA exam. Keep it simple, buy FSR and ride that wave into profit.
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Preston
Super Contributor
@skaap, Sound like my CFA exam. Keep it simple, buy FSR and ride that wave into profit.
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