Futures

Derivatives and options

 Daily Settlement of Futures
The daily settling of gains and losses due to changes in the
market value of the futures contract is known as marked to
market.
The exchange sets two margin requirements.
 Initial Margin: the deposit required to open the contract.
 Maintenance Margin: the amount of money that each
participant must maintain in the account after the trade is
initiated. Accounts below the maintenance margin will
receive a margin call.
If a party receives a margin call, they must restore the
account to the initial margin by depositing more funds and/or
by closing out positions.
 Example of Daily Settlement

A trader goes long at a futures price of $1200. The exchange requires an initial
margin of $150 deposited and a maintenance margin of $75.
At the end of the day 1, the futures price settles at $1180.
 The account is marked to market at $1180, and $20 is withdrawn from the
trader’s account bringing the balance to $130.
At the end of day 2, the futures price settles at $1120.
 The account is marked to market at $1120, and $60 is withdrawn from the
trader’s account bringing the balance to $70.
 The margin balance is below the required maintenance margin, so the trader
receives a margin call.
 To keep the trade going, the trader must deposit enough money to bring the
account back the Initial Margin so $80 must be deposited.