Margin Account Operation

Margin accounts are a crucial aspect of futures trading. They serve as a performance bond, ensuring that traders can meet their obligations.

Key Concepts:

1. Initial Margin: The amount of money a trader must deposit with their broker when initiating a futures position. It's a percentage of the total contract value and is set by the exchange. Think of it as a "good faith" deposit.
2. Maintenance Margin: The minimum amount of equity that must be maintained in the margin account. If the account balance falls below this level due to losses, the trader receives a margin call.
3. Margin Call: A demand from the broker to deposit additional funds to bring the margin account balance back up to the initial margin level. Failure to meet a margin call can result in the broker liquidating the trader's position.
4. Variation Margin: The amount of funds needed to be deposited to fulfill a margin call.

Example:

• A trader buys one futures contract for 1,000 barrels of oil at $70 per barrel.
• Contract Value: $70,000
• Initial Margin: 10% = $7,000
• Maintenance Margin: 7% = $4,900

Scenario:

• Day 1: The futures price drops to $68. The trader's account is debited $2,000 (1,000 barrels * $2 loss). The margin account balance is now $5,000.
• Day 2: The futures price drops further to $67. The account is debited another $1,000. The margin account balance is now $4,000, which is below the maintenance margin of $4,900.
• Margin Call: The trader receives a margin call for $3,000 ($7,000 initial margin - $4,000 current balance). They must deposit this amount to continue holding the position. If they fail to do so, their position may be liquidated by the broker.