Key Figures in Futures Contracts
Margin Improvement in Futures
Frequently Asked Questions (FAQs)
Introduction
If you are a trading broker or new to the market looking for ways to achieve significant gains, you have likely heard a lot about margin. Margin is a critical concept for those dealing in futures and derivatives of all kinds. Margin in futures contracts is a good faith deposit or the amount of money one needs to deposit in their account to control a futures contract. Margins in futures markets are not down payments like stock margins. Instead, they are performance guarantees designed to ensure that traders can meet their financial obligations.
Key Figures in Futures Contracts
In the world of futures contracts, margin requirements can vary significantly. In a standard futures contract, the margin requirement ranges from 3% to 12% of the total value of the contract.
Initial Margin
The initial margin in futures contracts is the amount of money you need to open a buy or sell position in a futures contract. The initial margin is also referred to as the “original margin,” which is the same amount sent when the trade is first executed.
Maintenance Margin
The maintenance margin is the amount of money you need to maintain your account balance at any time to cover your losses. If a futures position incurs a loss, you will need to deposit enough money in your account to bring your margin back up to the initial or original margin level.
Margin Calls
Margin calls are triggered when the value of the account falls below the maintenance level. For example, if you hold five futures contracts with an initial margin of $10,000 and a maintenance margin of $7,000, when the value of your account drops to $6,500, the margin call will require you to deposit an additional $3,500 into your account to restore it to the initial margin level.
Calculating Margin in Futures Contracts
Exchanges calculate margin prices in futures contracts using a program called SPAN. This program measures several numbers to arrive at a final figure for the initial margin and maintenance margin in each futures market. The biggest factor in determining margins is the volatility in each futures market, or how stable (or unstable) it is expected to be in the future. Exchanges adjust their margin settings based on market conditions.
Benefits of Margin in Futures Contracts
Margin is a good faith deposit made by the buyer with the clearinghouse of the exchange. Margin can somewhat be thought of as a down payment on the full value of the contract you are trading. Margin allows the exchange to become the buyer to every seller and the seller to every buyer of a futures contract, or in technical terms, the “counterparty.”
Frequently Asked Questions (FAQs)
How do you calculate the initial margin for futures contracts?
Which futures contract has the highest margin requirements?
Sources:
– U.S. Commodity Futures Trading Commission
– SEC Office of Investor Education and Advocacy
– FINRA
– CME Group
– Investor.gov
– Bank for International Settlements
– Commodity Futures Trading Commission
– U.S. Securities and Exchange Commission
Source: https://www.thebalancemoney.com/all-about-futures-margin-on-futures-contracts-809390
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