Margins.

Margin is a critical concept for those trading commodity futures and derivatives in all asset
classes. Futures margin is a good-faith deposit, or an amount of capital one needs to post or
deposit to control a futures contract. The margin is a down payment on the full contract value of
a futures contract.Futures exchanges determine and set futures margin rates. At times, brokerage
companies will add an extra premium to the minimum exchange margin rate to lower risk
exposure.The margin is set based on the risk of market volatility. When market volatility or price
variance moves higher in a futures market margin rates rise
When trading stocks, there is a simpler margin arrangement than in the futures market. The
equity market allows participants to trade on up to 50% margin. Therefore, one can buy or sell up
to $100,000 worth of stock for $50,000.
In the world of futures contracts, the margin rate is much lower. In a typical futures contract,
the margin rate varies between 5 and 15% of the total contract value. For example, the buyer of
a contract of wheat futures might only have to post $1,700 in margin. Assuming a total contract
of $32,500 ($6.50 x 5,000 bushels) the futures margin would amount to around 5% of the
contract value.
Initial Margin
This is the initial amount of cash that must be deposited in the account to start trading
contracts. It acts as a down payment for the delivery of the contract and ensures that the
partieshonor their obligations.

Maintenance Margin
This is the balance a trader must maintain in his or her account as the balance changes due
to price fluctuations. It is some fraction - perhaps 75% - of initial margin for a position. If the
balance in the trader's account drops below this margin, the trader is required to deposit enough
funds or securities to bring the account back up to the initial margin requirement. Such a demand
is referred to as a margin call. The trader can close his position in this case but he is still

responsible for the loss incurred. However, if he closes his position, he is no longer at risk of the
position losing additional funds

Variation Margin
This is the amount of cash or collateral that brings the account up to the initial margin amount
once it drops below the maintenance margin.

Margin Calls
When the value of an account drops below the maintenance level a margin call is
triggered. For example, you hold five futures contracts that have an initial margin of $10,000 and
a maintenance margin of $7,000. When the value of your account falls to $6,500 a margin call
will require an additional $3,500 to return the account to the initial margin level. Closing or
liquidating a position eliminates the margin call requirement.

How to Calculate Futures Margin

Exchanges calculate futures margin rates using a program called SPAN. This program
measures many variables to arrive at a final number for initial and maintenance margin in each
futures market. The most critical variable is the volatility in each futures market. The exchanges
adjust their margin requirements based on market conditions.

Margin In Futures Has Many Benefits

Margin is a good faith deposit that a market participant posts with the exchangeclearing
house. Think of margin as a down-payment on the full value of the contract that you are trading.
Margin allows the exchange to become the buyer for every seller and the seller for every buyer

of a futures contract. Margin has two benefits for market participants; it guarantees anonymity
(the exchange is always your counterparty), and it eliminates counterparty credit risk from the
transaction. Exchanges are regulated by the CFTC and have plenty of funds on hand to meet all
obligations. Those funds come from the margin collected by market participants.
Since margin is only a small percentage of total contract value, there is a tremendous
amount of leverage in futures markets. Let us look at an example:
Buy one contract of a COMEX gold future at 1270
Each contract is for 100 ounces of gold
Initial margin= $4400
Sell one contract of COMEX gold future at 1275
Profit- $5 per ounce or $500 per contract
If you bought the actual gold and made a $5 profit that would equate to a 0.3937% gain
($5/$1,270)
However, since you bought the gold futures contract, the gain is calculated on the amount of
margin posted for the trade or $4,400 and the profit would equate to an 11.36% gain
($500/$4,400)
While the percentage gain in the futures market is high, remember that where there is the
potential for rewards, there is always a risk. If you lost $5 per ounce on a one contract gold
futures position, your loss would equate to 11.36% as well. Exchanges set margin levels and
constantly review them when market volatility changes -- margins can go up or down at any
time. FCMs are permitted to require higher margins than exchange levels based on the risk of
the customer and their ability to contact them on a moments notice.
Margin is the glue that holds the futures markets together in that it allows market
participates to trade with confidence that others will meet all obligations at all times.

Initial Margin
This is the initial amount of cash that must be deposited in the account to start trading
contracts. It acts as a down payment for the delivery of the contract and ensures that the
partieshonor their obligations.

Maintenance Margin
This is the balance a trader must maintain in his or her account as the balance changes due
to price fluctuations. It is some fraction - perhaps 75% - of initial margin for a position. If the
balance in the trader's account drops below this margin, the trader is required to deposit enough
funds or securities to bring the account back up to the initial margin requirement. Such a demand
is referred to as a margin call. The trader can close his position in this case but he is still
responsible for the loss incurred. However, if he closes his position, he is no longer at risk of the
position losing additional funds

Variation Margin
This is the amount of cash or collateral that brings the account up to the initial margin amount
once it drops below the maintenance margin.
Settlement Price
Settlement price is established by the appropriate exchange settlement committee at the
close of each trading session. It is the official price that will be used by the clearing house to
determine net gains or losses, margin requirements and the next day's price limits. Most often,
the settlement price represents the average price of the last few trades that occur on the day. It is

the official price set by the clearing house and it helps to process the day's gains and loses in
marking to market the accounts. However, each exchange may have its own particular
methodology. For example, on NYMEX (the New York Mercantile Exchange) and COMEX
(The New York Commodity Exchange) settlement price calculations depend of the level of
trading activity. In contract months with significant activity, the settlement price is derived by
calculating the weighted average of the prices at which trades were conducted during the closing
range, a brief period at the end of the day. Contract months with little or no trading activity on a
given day are settled based on the spread relationships to the closest active contract month, while
on the Tokyo Financial Exchange settlement price is calculated as the theoretical value based on
the expected volatility for each series set by the exchange.