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Margins and Daily Settlements, Financial Markets

In: Business and Management

Submitted By vanesatuha
Words 1726
Pages 7
Margins and Daily Settlements

Marking to markets
Margins are important aspects of future markets as they are used to operate in between investors, which got in touch and agreed to trade an asset in the future, to avoid contract defaults. In their cooperation there may appear obvious risks, as e.g. one of the investors regrets the deal and tries to back out. Therefore the exchange must be organized to prevent these situations.

EXAMPLE of how does it work

Investor Thursday June 5 -> contacts broker to buy 2 December gold future contracts Current future price: $ 600 per ounce Contract size: 100 ounces Contracted to buy: 200 ounces at that price

Broker Requires the investor to deposit funds in a margin account Amount that must be deposited at the time the contract is entered into is initial margin -> we suppose it is $2,000 per contract $4,000 in total (2x contract of $2,000) At the end of each trading day the margin account is adjusted to reflect the investor’s gain or loss -> this practice is known as marking to market the account

Let’s suppose that by the end of June 5 the futures price drops from $600 to $597 -> loss for the investor ($600 =200 * $3), because the 200 ounces for December gold, that were contracted at $600, can now be sold only for $597. The balance in the margin account of $4,000 will now be reduced by $600 to only $3,400.
Let’s suppose that by the end of June 5, the first day, the futures price rise to $603, this will cause a gain for investor because the 200 ounces for December gold can be sold for $603 now and the balance in the margin account would increase by $600 to $4,600.

The trade is first marked to market at the close of the day it takes place and then it is marked to market at the close of trading on each following…...

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