This concept will be better explained by using an example to compute the margin balance.
Let's start with a future's price of $200. The initial margin requirement is $10 and the maintenance margin is $6. The trader buy five contracts and deposits $50 (5 contacts x $10)
Day 0 - The ending balance is $50.
Day 1 - The price moves to $199.50. The adjustment that needs to be made is -$2.50 (200-199.5 x 5 contracts). The ending balance is now $47.50 ($50 - 2.50). Since this is above the maintained margin ($30) no funds need to be added to the account.
Day 2 - The price moves down to $195. The loss, based on five contracts, is $22.50, so the account balance is $25. This is below the maintenance margin. The trader will receive a margin call and will need to deposit $25 into the account to bring it back up to the initial margin requirement.
This continues over the course of the trade until it is closed out. Please follow the following charts:
For a long position of five contracts, initial margin = $5, maintenance margin =$3
|Day||Beginning Balance||Funds Deposited||Settlement Price||Future Price Change||Gain/Loss||Ending Balance|
For a short position of five contracts, initial margin = $5, maintenance margin =$3
Learn more about what margin is, how margin calls work, how leverage can have advantages and why using margin can be risky in our Margin Trading tutorial.
Closing and Terminating a Futures Position
InvestingWhen an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
InvestingInitial margin is the percentage of a stock’s price an investor must have in his account to buy that stock on margin.
Financial AdvisorInvesting on margin can be profitable but it's a risky play that needs care.
InvestingFind out how it provides futures and commodity option strategists with more bang for their margin buck!
Financial AdvisorFind out exactly what margin is and why it's important.
InvestingAn underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
Managing WealthSurprisingly, the younger your company is, the better its numbers may look.