Participants in a futures contract are required to post performance bond margins in order to open and maintain a futures position.
Futures margin requirements are set by the exchanges and are typically only 2 to 10 percent of the full value of the futures contract.
Margins are financial guarantees required of both buyers and sellers of futures contracts to ensure that they fulfill their futures contract obligations.
Before a futures position can be opened, there must be enough available balance in the futures trader's margin account to meet the initial margin requirement. Upon opening the futures position, an amount equal to the initial margin requirement will be deducted from the trader's margin account and transferred to the exchange's clearing firm. This money is held by the exchange clearinghouse as long as the futures position remains open.
The maintenance margin is the minimum amount a futures trader is required to maintain in his margin account in order to hold a futures position. The maintenance margin level is usually slightly below the initial margin.
If the balance in the futures trader's margin account falls below the maintenance margin level, he or she will receive a margin call to top up his margin account so as to meet the initial margin requirement.
Let's assume we have a speculator who has $10000 in his trading account. He decides to buy August Crude Oil at $40 per barrel. Each Crude Oil futures contract represents 1000 barrels and requires an initial margin of $9000 and has a maintenance margin level set at $6500.
Since his account is $10000, which is more than the initial margin requirement, he can therefore open up one August Crude Oil futures position.
One day later, the price of August Crude Oil drops to $38 a barrel. Our speculator has suffered an open position loss of $2000 ($2 x 1000 barrels) and thus his account balance drops to $8000.
Although his balance is now lower than the initial margin requirement, he did not get the margin call as it is still above the maintenance level of $6500.
Unfortunately, on the very next day, the price of August Crude Oil crashed further to $35, leading to an additional $3000 loss on his open Crude Oil position. With only $5000 left in his trading account, which is below the maintenance level of $6500, he received a call from his broker asking him to top up his trading account back to the initial level of $9000 in order to maintain his open Crude Oil position.
This means that if the speculator wishes to stay in the position, he will need to deposit an additional $4000 into his trading account.
Otherwise, if he decides to quit the position, the remaining $5000 in his account will be available to use for trading once again.
To buy or sell futures, you need a broker that can handle futures trades.
OptionsHouse is a full fledged Futures Commission Merchant that provides a streamlined access to the futures markets at extremely reasonable contract rates.Click here to open a futures trading account at OptionsHouse.com now!
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