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.
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