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Margin Requirements in Futures Contracts

CFA® Exam Level 1, Derivatives

This lesson is part 4 of 6 in the course Futures Markets and 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.

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.

Previous Lesson

‹ Price Limits in Futures Contracts

Next Lesson

How Futures Contracts are Terminated/Settled? ›

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In this Course

  • Characteristics of Futures Contracts
  • Role of Margin Money in Futures Trading
  • Price Limits in Futures Contracts
  • Margin Requirements in Futures Contracts
  • How Futures Contracts are Terminated/Settled?
  • Characteristics of Different Types of Futures Contracts

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