In this module, we're going to introduce you to the mechanics of the margin account associated with futures contracts using an Excel spreadsheet. We're going to use both historical data and simulated data to show you all the various situations that can occur in the margin account. In this module, we're going to walk you through the mechanics of corn futures. I'm going to show you two different worksheets. In the first worksheet, I'm going to show you the mechanics using historical data. In the second worksheet, I'm going to show the same mechanics using simulated data. And, the reason I'm looking at two different worksheet, because it turns out for the historical data that I used, there's no margin call. And it's important for me to show you how the margin calls work. So, you want to consider a situation where an investor is buying one for, future's contract for 5,000 bushels of corn. So, the contract value is 5,000 bushels. The initial margin that this investor is asked to put into the margin account is 1,688, so $1,688. The maintenance margin is going to be 1,250, which is $1,250. And these numbers are going to be scaled by the number of contracts that the investor wants to hold. So, for one contract, it's 1,688 as the initial martin and 1,250 is the maintenance margin. And these numbers are taken from the website coded over here. So, on, this investor has bought the future's contract with an expiration of March 15th. That's the date over here. And he purchases this contract at February 22nd. On that date, the price of the futures contract was 690.25, so $0.690.25 per bushel. On that day, he put in $1,688 into the margin account. On the next trading date, which was found to be February 25th, the future's prize goes up to $693.50. The investor is holding a long position, so makes a profit of $163. And how did that come out? It's going to be, the dollar amounts converted, the cents converted into dollars. So, that's a divide by 100. The number of positions that I hold, 1 times what is the contract value, which is 5,000 bushels, times the difference between the price on February 25th minus the price on February 22nd. It turns out to be $130, $163. That amount gets credited into the margin account. So, instead of $1,688 in the margin account, now it's got $1,851. On the next day, it jumps up to $705. He makes $575 profit, which also gets credited into the margin account, and so on. Another profit, another profit, another profit and now a loss. That loss gets debited from the account, so it, he has $3,388 here. It gets reduced to $3,326. Now, even though there is a loss, the broker does not ask the investor put in more money into the margin account. And, the broker will not ask this person to put in more money until the value drops below the maintenance margin of 1,250. Makes a profit of 450. And now makes a serious loss of $1,200. But still, the margin account is above the 1,250 minimum margin. And therefore, there is no margin call. And so on, it keeps going. And on March 15, it expires. It's cancelled. And the net amount of money that this investor made on this particular investment was $2,013. So, 3,701 minus 1,688 is the profit, $2,013. You made $2,013 profit on just $1,688 worth of investment. It's a huge profit and this is what we were talking about before that by taking leverage, you can make a huge profit. Here, we're talking about what would happen if there's a forward contract instead of a futures contract. The cut in price is corn price, not the futures price, was 690 on February 22nd. So, the forward price is going to be 690 times the interest divided by 100 and I took the interest rate to be 20.25%. Times the difference in the date divided by 250 in order to convert it into an annual number. So the, so the forward price turns out to be $690.36. The spot price on termination turns out to be $730, the difference is what you'll end up getting as a profit. So, it's the number of contracts times the difference in the price divided by 100 times. D27, which is the number of contacts that you had. And that turns out to be the profit that you are going to make. In this worksheet, I am showing you a simulation of the mechanics of the corn futures. And this particular simulated worksheet was created just to show you what happens with margin calls. In order to construct the prices for corn, what I did was I assumed that the price of corn does a random walk. So it takes the mean value as the previous day's price, plus the volatility times a normal random variable. The volatility which is given in cell H4 was computed using the volatility of the historical prices that I'm showing in the previous worksheet. So I use that volatility, I computed a simulation for those of you who want to do this simulation again, you can just use F9 to create another simulation. So, here's, I'm generating several different simulation. In some cases, you have margin calls. In some cases, you don't, and so on. So, let's consider a particular one which has a nice margin call over here, for example. So, what happens in this particular case? It starts off with 690.25 with a margin account. Makes a profit. The margin account increases. It makes a loss, the marginal account decreases. But still, it's above the 1,250 minimum margin that, or the maintenance margin that is required. Next day, it makes a loss further. And now, it drops below the maintenance margin of 1,250. So, there's a margin call. And the investor is asked to make the margin account back to the initial margin. And, the amount of money that they are to put in is $633. It makes a loss. But now, the amount is still above the 1,250. It's 1,258, so there is no margin call. Then imakes a huge profit. And the margin account goes up. Several losses. And in the very end, there's a huge loss. It drops below and it has to make up back again, so you get $503 as the loss. And in this particular simulation run, the total profit and loss turns out to be minus $1,000. So, you put in a margin account of 1,688 plus 633. Another margin call plus 503, this was a total investment that you put into the margin account. And, the net loss that you get was minus 1,000. So, in this particular case, you did not make a profit but you made a loss.