Margin Account Operation

In futures trading, margin accounts are used to manage credit risk between parties. They ensure that both buyers and sellers can fulfill their contractual obligations.

1. Initial Margin: The upfront deposit required to enter into a futures position. It acts as a performance bond.

   Example: To enter a futures contract for 100 barrels of oil, with an initial margin requirement of $1,000, the trader must deposit $1,000 into their margin account.

2. Maintenance Margin: The minimum account balance that must be maintained. If the account balance falls below this level due to adverse price movements, a margin call is issued, requiring the trader to deposit additional funds.

   Example: If the maintenance margin is set at $800 and the account balance drops to $750, the trader will receive a margin call to bring the balance back to the initial margin level.

3. Mark-to-Market: Daily adjustment of the margin account to reflect gains or losses based on the day's closing prices. Profits are added to the account, and losses are deducted.

   Example: If the futures position gains $200 in value on a particular day, the margin account is credited with $200. Conversely, if it loses $200, the account is debited accordingly.

Understanding these concepts is crucial for managing risk and making informed decisions in the derivatives market.