Margin Requirements in Futures Contracts

In a futures contract, the margin balance is adjusted everyday based on the changes in the settlement price from the previous day. This process is called mark-to-market.

Usually, marking to market (MTM) is does on a daily basis, however exchanges may require more frequent marking to market under extreme market conditions.

In this article, we will take an example to understand margin calculations work.

Assume a long position in 10 futures contracts on XYZ stock. Each contract covers 100 stocks.

The contract price is $10, the initial margin required is $100 and the maintenance margin required is $75.

For 10 contracts, the total initial margin is $1,000 and maintenance margin is $750.

During the next three days, the price changes as follows:

Day 1: -30 cents

Day 2: +10 cent

Day 3: -30 cents

Let's compute the margin balance for each of the five days.

Since there are 100 stocks in each futures contract, a 1 cent change in price changes the contract value by $1 or $10 for 10 contracts.

The following table shows the margin balance for the three days.