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 marktomarket.
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.
Day  Required Deposit  Price/Stock  Daily Change  Gain/Loss  Balance 

 0

1000

10

0

0

1000
 
1

0

9.7

0.3

300

700
 
2

300

9.8

0.1

100

1100
 
3

0

9.5

0.3

300

800

Let’s understand the margin calculation on each day. On Day 1 itself, the margin balance has gone below the maintenance margin of $750. It has reach $700 and the trader is required to deposit $300 to replenish the margin balance back to the original $1000. On day two, the price moved up creating a gain of $100. The margin balance at the end of day two is $1100. On Day 3 again, the price moves down by 30 cents. However, at the end of the day, the margin balance is $800, that is, above the margin balance. So, no margin call is required.
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