Lecture Notes: Futures Industry Margin

Overview of Margin in Futures

• Margin in the futures industry is established by exchanges.
• Types of Margin:
  • Initial (Original) Margin: Deposit required when taking a position.
  • Maintenance Margin: Minimum equity needed to maintain a position.

Characteristics of Margin

• Long vs. Short: Margin requirements are the same whether you go long or short.
• Hedger vs. Speculator Margin:
  • Hedger margin often lower than speculator margin due to offsetting positions in cash and futures markets.
  • Hedging involves less risk as losses in one market offset gains in another.

Margin Calculations

• Initial Margin Requirement: Deposit needed to open a position.
• Maintenance Margin Requirement: Equity level required to avoid a margin call.
• If equity falls below maintenance margin, a call is made to replenish equity to the initial margin level.
  • Total Equity = Account Cash Balance ± Open Trade Equity.

Example Calculations

Example 1: Wheat Futures

• Initial Margin Requirement: 80 cents/bushel
• Maintenance Margin Requirement: 60 cents/bushel (usually ~75% of initial margin)
• Contract Size: 5,000 bushels
• Scenario: Long position at $6 per bushel
  • Deposit $4,000 to open ($0.80 x 5,000)
  • Equity changes with market movements (e.g., loss of $0.10 results in $3,500 equity)
  • Margin Call Trigger: Loss exceeding the difference between initial and maintenance requirements.

Example 2: Gold Futures

• Initial Margin Requirement: $70/ounce
• Maintenance Margin Requirement: $50/ounce
• Contract Size: 100 ounces
• Scenario: Short position at $1,400
  • Deposit $7,000 to open ($70 x 100)
  • Market rise to $1,425 results in a loss and margin call.

Example 3: S&P 500 Futures

• Initial Margin per Contract: $25,000
• Contract Multiplier: $250 per point
• Scenario: Short five contracts at 1305.5
  • Market drop to 1295.5 results in a calculable profit.
  • Total equity calculated based on profit per contract.

Important Concepts

• Pyramiding: Using excess equity to establish additional positions.
• Leverage: Margin allows control over a larger position than the deposit, resulting in potential for high profits or losses.
• Equity Calculations:
  • Equity above the initial margin can be withdrawn or used for additional positions.

Recommendations

• Practice margin calculations with custom exams.
• Next Steps: Study long and short speculators, and profit/loss calculations.