P.Krishnaveni/MBA/SNSCT MARGIN REQUIREMENTS If two investors get in touch with each other directly and agree to trade an asset in the future for a certain price, there are default risks. One of the key roles of the exchange is to organize trading so that contract defaults are avoided. This is where margins come in. P.Krishnaveni/MBA/SNSCT

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P.Krishnaveni/MBA/SNSCT MARGIN REQUIREMENTS THE OPERATIONS OF MARGINS In addition to the clearing house, there are some other safeguards for future requirements for margin and daily settlement. Margin requirements are required for the investor and the trader. Before entering into futures contract, the prospective trader(investor) must deposit some funds with his broker which serve as good faith deposit. An investor who enters into futures contract is required to deposit funds with the broker called a margin. P.Krishnaveni/MBA/SNSCT

P.Krishnaveni/MBA/SNSCT MARGIN REQUIREMENTS The basic objective of margin is to provide a financial safeguard for ensuring that the investors will perform their contract obligations. The exchanges set minimum margin but broker may require large margin, they are ultimately responsible for their clients losses. The margin may vary contract to contract even broker to broker. Form of amount may be cash, bank’s letter of credit and treasury securities deposited as margin. P.Krishnaveni/MBA/SNSCT

P.Krishnaveni/MBA/SNSCT MARGIN REQUIREMENTS Margin account may or may not earn interest. Some brokers may pay them money market interest rates. TYPES OF MARGIN Initial margin Maintenance margin Variation margin P.Krishnaveni/MBA/SNSCT

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P.Krishnaveni/MBA/SNSCT MARGIN REQUIREMENTS Initial margin: It is the original amount that must be deposited into account to establish futures position. To determine the initial margin, the exchange usually considers the degree of volatility of price movements in the past of the underlying the asset. The clearing house covers losses on the position even in most adverse situation. The initial margin approximately equals the maximum daily price fluctuation permitted by the exchange for that underlying asset . The exchange has the right to increase or decrease the quantum of initial marginal depending upon the likely anticipated changes in the futures price. The margin may be 5% or less of the underlying asset P.Krishnaveni/MBA/SNSCT

P.Krishnaveni/MBA/SNSCT MARGIN REQUIREMENTS The Maintenance Margin; It is the minimum amount which must be remained in a margin account . Such minimum balance must be maintained by the investor. It is about 75% of the initial margin. If futures prices move against the investor resulting in falling the margin account below the maintenance margin, the broker make a call, i.e., asking the client to replenish the margin account by paying the variation. The demand for additional fund is known as a margin call. P.Krishnaveni/MBA/SNSCT

P.Krishnaveni/MBA/SNSCT MARGIN REQUIREMENTS The Variation Margin: It refers to that additional amount which has to be deposited by the trader with the broker to bring the balance margin account to the initial margin level. If the investors does not pay the initial margin immediately, the broker may proceed to unilaterally close out the account by entering into an offsetting futures position. P.Krishnaveni/MBA/SNSCT