What is Futures Margin? – What Is It? How Does It Work?

What is Futures Margin? – What Is It? How Does It Work?

In today’s video we’re going to learn about futures margin if you’re new to derivatives take a look at my other videos explaining what derivatives are our futures are how futures are priced and so on subscribe to the channel if you’d like to learn about other derivatives like option swaps credit derivatives and so long these videos are all based on my book

Trading and pricing financial derivatives which is available on amazon.com if you’re really interested in the topic it might be worth taking a look at that it’s also available at a lot of university libraries there’s an amazon link in the description down below okay so let’s dig into today’s topic futures margin the term margin refers to money that’s used to

Buy securities buying securities in a levered manner is usually referred to as buying on margin the amount of margin posted refers to the amount of equity contributed by a customer as a percentage of the current market value of the securities so if you only have to put up say half of the money necessary to buy the securities you’re buying we refer to that as a

50% margin requirement the reason that exchanges and counterparties demand margin is to minimize credit risk which is the risk that you’ll be unable to pay them in full typically traders must post margin or a liquid bond which is sometimes referred to as a performance bond of between 5% to 15% of the contracts volume futures margin rates are set by the futures

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Exchanges sometimes brokerages will add an extra premium to the exchange minimum rate in order to lower their risk exposure to a particular client margin is usually set based on risk the larger the dollar value moods that a futures market commonly makes the higher the margin rates will be for that contract to minimize counterparty risk to traders trades executed

On a regulated futures exchange are guaranteed by a clearinghouse i have another video that will explain what clearing is that’s coming out i think tomorrow margin requirements are there so the traders can transact with each other without performing due diligence on each counterparty that they deal with this allows for an orderly market with greatly enhanced

Liquidity margin requirements are reduced in many cases for hedgers who have physical ownership of the underlying commodity or for spread traders who have offsetting contracts balancing and thus reducing the risk of their positions there are a few different types of margin the first one is initial futures margin and that’s the amount of money that’s required

To initiate a buy or sell position on a futures contract initial margin requirement is calculated based on the maximum estimated change in contract value within a trading day and is set by the exchange then there’s margin maintenance and that’s the set minimum margin per outstanding futures contract that a customer must maintain in their margin account so for

Example we’ll suppose that the margin on an oil futures contract is $100 and that the maintenance margin is $70 if you buy 10 oil futures contracts you’ll need to put up $1,000 to start with that’s 10 contracts times $100 and that will be set aside as initial margin if the price of the oil drop such that you lose will say $300 or more you’ll have violated the

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Maintenance and you’ll need to add funds to bring it back up to the initial maintenance level so maintenance margin is usually a little bit lower than initial margin usually to give investors a little wiggle room before having to top-up their accounts so what is a margin call well apart from being a 2011 film that’s fairly obviously about the meltdown of lehman

Brothers the term margin call is a term the traders who have nightmares about a margin call on futures contracts is triggered when the value of your account drops below the maintenance level and it involves the broker asking the client who might be either a header or a speculator to deposit sufficient funds into their account to maintain their trading position

Including maintenance margin so what that means is that you’ve lost probably a significant amount of money the fact that your account is under margin means that you’re kind of a risk to your clearing firm and so they call you up and say you have to top up your money you usually have to top it up right away so it’s not you know you don’t sort of wait three days

You either get the money into your account that day or they close out your positions okay so hopefully that’s all you need to know about futures margin do take a look at my other videos on financial derivatives to learn more coming up in the next video we’re going to learn about how the futures clearinghouse works hopefully enjoyed this video so please hit the

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Transcribed from video
What is Futures Margin? – What Is It? How Does It Work? By Patrick Boyle

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