Understanding Margin in Futures With An Example2 min readReading Time: 2 minutes
When two traders agree to trade a specific asset at a certain price in the future, there are certain risks involved. A key role of exchanges is to eliminate the risk of credit default.
What Is Mark To Market?
To enter into a futures agreement, one must deposit a margin amount with his/her broker. The amount that must be deposited at the initiation of the contract is called the initial margin. The margin account is adjusted at the end of each trading day to reflect the investor’s gain or loss. This practice is called mark to market.
Here’s an example for you!
Let us consider a trader who has deposited Rs. 1,50,000 with his/her broker and let us assume that he wants to trade Nifty Futures.
The relevant details for the trader are as follows:
Contract: NIFTY 29-JUL-2021
- Lot size: 50 qty
- Price: 15850
- Side: Buy
- Required Margin: Approx Rs. 1,10,000
- Today’s Date: 16- 6-2021
If the end of the day price comes down to 15800, the loss is Rs. 50 * 50 qty= Rs. 2500.
Margin Account = 1,47,500.
If price closed at 15900 = Gain 50 points = Rs. 50 * 50 qty = Rs, 2500 gain.
Margin Account = 1,52,500.
In either case, the margin account is well above the required margin of 1,10,000. Therefore, there will be no margin calls.
The investor is allowed to withdraw any funds in excess of the initial margin from the margin account. To ensure that funds in the margin account never becomes negative, a maintenance margin is set.
Whenever the balance in the margin account falls below the maintenance margin, the investor receives a margin call and the investor is expected to top up the account to the initial margin. Brokers also allow investors to deposit securities to satisfy the initial margin requirement.
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