Futures margin mechanics

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Futures margin mechanics

Lets think a little bit about how margin works for futures contract.

So lets say that the terms of the contract are a 1,000 pounds of apples for delivery on November 15th.

And we're assuming that this is some date in the future.

And right now on the futures exchange the market delivery price, so the price in which the apples will change hand in the future is 200 dollars.

And I've written here what the exchange specifies for the initial and maintenance margin.

And we'll talk about that more in a second but this essentially means that both the buyer and the seller for, the initial margin, have to put up 20 dollars.

Sometimes it will be specified as an absolute dollar amount, like I've just done, sometimes it might just be a percentage of the actual delivery price.

So they both have to put up $20, and this guy has agreed to buy a thousand pounds of apples from this guy on November 15th for 200 dollars.

So its essentially 20 cents a pound.

Now lets say that a day goes by and the next day - these guys have this contract - this price right here is fixed in their minds.

But lets say the next day the same contract between 2 other parties, between 2 other parties, the same contract, trades with the delivery price of $190.

Now all of a sudden this guy over here feels silly!

He's like: "man I'm agreeing to buy something for $200 dollars in the future, which some other dude, all of a sudden, has agreed to buy for $190 dollars".

This guy over here feels really smart, he agreed to sell something for $200 the day before, and now people are selling it for a $190, so he's kind of $10 better than the people participating in the futures market today.

The way mark to market works with futures contracts is that the exchange says "well, you know what?

I'm afraid that this guy, if things keep moving against him, he's not even going to want to put up the money to buy at $200 dollars if he can buy at the market for $190 dollars or something lower, so I'm going to reset their futures contract to a delivery price of $190".

But, to make things fair, this guy is gonna be $10 in the hole.

He's getting a $10 deal, if I take the delivery price from $200 to $190 dollars I need to take $10 from this guy, because he's getting a $10 dollars better deal.

So from his margin account I take it from 20 dollars to $10 dollars and then I place the $10 in this guy's margin account.

If he's going to get a $10 less of a good price on the delivery date then let me give him the $10 dollars right now, so his margin account will go to $30 dollars, now if this number was $18, $17, $16 or $15 this guy wouldn't have to do anything.

But right here he has triggered his maintenance margin, and actually, he's right at our maintenance margin.

So lets say that he goes, that the next day this happens a little bit more, he goes down to $185 and we have to do the process again: This guy losses $5, he goes down to $5.

This guy will be given $5, so he goes to $35 dollars in order for him to essentially reset the futures price, he's been given another $5.

Now this guy has only $5 in his margin account and the maintenance margin is $10, so it triggers a margin call, and this guy is got to find some place to put another $15 dollars in his margin call.

Every time you get below the maintenance margin, it triggers a margin call and you have to refill your margin account to the initial margin.

So he has to add $15 so he gets back to $20.

번역 0%

Futures margin mechanics발음듣기

다른 번역문 등록

Lets think a little bit about how margin works for futures contract.발음듣기

다른 번역문 등록

So lets say that the terms of the contract are a 1,000 pounds of apples for delivery on November 15th.발음듣기

다른 번역문 등록

And we're assuming that this is some date in the future.발음듣기

다른 번역문 등록

And right now on the futures exchange the market delivery price, so the price in which the apples will change hand in the future is 200 dollars.발음듣기

다른 번역문 등록

And I've written here what the exchange specifies for the initial and maintenance margin.발음듣기

다른 번역문 등록

And we'll talk about that more in a second but this essentially means that both the buyer and the seller for, the initial margin, have to put up 20 dollars.발음듣기

다른 번역문 등록

Sometimes it will be specified as an absolute dollar amount, like I've just done, sometimes it might just be a percentage of the actual delivery price.발음듣기

다른 번역문 등록

So they both have to put up $20, and this guy has agreed to buy a thousand pounds of apples from this guy on November 15th for 200 dollars.발음듣기

다른 번역문 등록

So its essentially 20 cents a pound.발음듣기

다른 번역문 등록

Now lets say that a day goes by and the next day - these guys have this contract - this price right here is fixed in their minds.발음듣기

다른 번역문 등록

But lets say the next day the same contract between 2 other parties, between 2 other parties, the same contract, trades with the delivery price of $190.발음듣기

다른 번역문 등록

Now all of a sudden this guy over here feels silly!발음듣기

다른 번역문 등록

He's like: "man I'm agreeing to buy something for $200 dollars in the future, which some other dude, all of a sudden, has agreed to buy for $190 dollars".발음듣기

다른 번역문 등록

This guy over here feels really smart, he agreed to sell something for $200 the day before, and now people are selling it for a $190, so he's kind of $10 better than the people participating in the futures market today.발음듣기

다른 번역문 등록

The way mark to market works with futures contracts is that the exchange says "well, you know what?발음듣기

다른 번역문 등록

I'm afraid that this guy, if things keep moving against him, he's not even going to want to put up the money to buy at $200 dollars if he can buy at the market for $190 dollars or something lower, so I'm going to reset their futures contract to a delivery price of $190".발음듣기

다른 번역문 등록

But, to make things fair, this guy is gonna be $10 in the hole.발음듣기

다른 번역문 등록

He's getting a $10 deal, if I take the delivery price from $200 to $190 dollars I need to take $10 from this guy, because he's getting a $10 dollars better deal.발음듣기

다른 번역문 등록

So from his margin account I take it from 20 dollars to $10 dollars and then I place the $10 in this guy's margin account.발음듣기

다른 번역문 등록

If he's going to get a $10 less of a good price on the delivery date then let me give him the $10 dollars right now, so his margin account will go to $30 dollars, now if this number was $18, $17, $16 or $15 this guy wouldn't have to do anything.발음듣기

다른 번역문 등록

But right here he has triggered his maintenance margin, and actually, he's right at our maintenance margin.발음듣기

다른 번역문 등록

So lets say that he goes, that the next day this happens a little bit more, he goes down to $185 and we have to do the process again: This guy losses $5, he goes down to $5.발음듣기

다른 번역문 등록

This guy will be given $5, so he goes to $35 dollars in order for him to essentially reset the futures price, he's been given another $5.발음듣기

다른 번역문 등록

Now this guy has only $5 in his margin account and the maintenance margin is $10, so it triggers a margin call, and this guy is got to find some place to put another $15 dollars in his margin call.발음듣기

다른 번역문 등록

Every time you get below the maintenance margin, it triggers a margin call and you have to refill your margin account to the initial margin.발음듣기

다른 번역문 등록

So he has to add $15 so he gets back to $20.발음듣기

다른 번역문 등록

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