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Margins are effectively deposit you have to pay in order to take a position in a futures market. If you wanted to buy one FTSE100 futures contract and the margin requirements are 5000 per contract, then you must have at least 5000 in your trading account. If you wanted to buy 5 contracts you would need a minimum of 25000 in your account. This margin is called initial margin, as it is what is required to initiate a position. Once you have a position in the market your account is marked to market at the end of each trading day, this means that your account balance is adjusted to reflect your gain or loss for the day. If your account balance falls below the maintenance margin requirement you will be required to increase the funds in your account to meet the initial margin requirements (this amount is called variation margin) or have your position liquidated. For example: FTSE100 Futures Initial Margin 5000 Maintenance Margin 3500 Lets say an investor buys 2 FTSE 100 Index futures contracts for a price of 5300. His initial margin requirement is 2 x 5000 = 10,000, which is the minimum he must have in his account to open this position. Let us assume that he has in his account exactly 10,000 when he buys the 2 contracts. At the end of the first day the price of the FTSE 100 Index futures has dropped to 5100, a fall of 200 points. The point value for the FTSE is 10, so our trader has a loss at the end of the first day of 2 x 10 x 200 = 4000. This will be reflected in his account, which will be reduced to 6000. As this is below the maintenance margin requirement of 7000, he will need to deposit 4000 into his account to maintain his position. 20 Delivery |
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