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Discuss Margins within the Financial Management ( FM ) forums, part of the Resolve Your Query - Get Help and discuss Projects category; MARGINS The concept of margin here is the same as that for any other trade, i.e. to introduce a financial ...

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Sunanda K. Chavan
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Margins - October 8th, 2010

MARGINS

The concept of margin here is the same as that for any other trade, i.e. to introduce a financial stake of the client, to ensure performance of the contract and to cover day to day adverse fluctuations in the prices of the securities bought. The margin paid by the investor is kept at the disposal of the clearinghouse through the brokerage firms. The clearing house gets the protection against po0ssible business risks through the margins placed with it in this manner and by the process of ‘marking to market’ (it means, debiting or crediting the clients’ equity accounts with the loss or gains of the day, based on which, margins are sought or released).

The margin for futures contract has two components
• Initial margin, and
• Maintenance margin.

Initial Margin

Unlike in an options contract where only the buyer is obligated to perform and not the seller (writer), in a futures contract both the buyer and the seller are required to perform the contract. Accordingly, both the buyer and the seller are required to put in the initial margins. The initial margin is also known as the performance margin and is usually 5 to 155 of the purchase price of the contract.

The margin is set by the stock exchange keeping in view the volume of business and the size of transactions a well as operative risks of the market in general.
The initial margin is the first line of defense for the clearing house. This protection is further reinforced by prescribing maintenance margin.

Maintenance Margin

In order to start dealings with a brokerage firm for buying and selling futures, the first requirement for the investor is to open an account with the firm. This account, called the equity account, has to be kept separate from any other account including the margin accounts. Maintenance margin is the margin required to be kept by the investor in the equity account equal to or more than a specified percentage of the amount kept as initial margin. Normally, the deposit in the equity account is equal to or more than 75% to 80% of the initial margin.

In case this requirement is not met, the investor is advised to deposit cash to make up the shortfall. If the investor does not respond, then the broker will close out the investor’s position by entering a reversing trade in the investor’s account.


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Example
A buyer buys a futures contract @ Rs. 50 per share for 500 shares from a seller. Both make a deposit of Rs. 2,500, being 10% of the total investment of Rs. 25.000 towards the initial margin.

The next day, the stock price rises to Rs. 52 per share. The equity of the buyer increases to Rs. 3,500 and that of the seller decreases to Rs. 1,500. As the maintenance margin is required to be maintained at 80% of the initial margin, the buyer and the seller are required to have a minimum equity of Rs. 2,00 everyday. The buyer has a surplus of Rs. 1,500 and he has the liberty of withdrawing this sum. The seller, on the other hand, is short of Rs. 500 and would be called upon to make up the shortfall by depositing cash. However, if the seller is unable to pay, the broker would enter a reversing trade by purchasing a future of the same expiration.

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Rose Marry
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Re: Margins - April 15th, 2016

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Originally Posted by sunandaC View Post
MARGINS

The concept of margin here is the same as that for any other trade, i.e. to introduce a financial stake of the client, to ensure performance of the contract and to cover day to day adverse fluctuations in the prices of the securities bought. The margin paid by the investor is kept at the disposal of the clearinghouse through the brokerage firms. The clearing house gets the protection against po0ssible business risks through the margins placed with it in this manner and by the process of ‘marking to market’ (it means, debiting or crediting the clients’ equity accounts with the loss or gains of the day, based on which, margins are sought or released).

The margin for futures contract has two components
• Initial margin, and
• Maintenance margin.

Initial Margin

Unlike in an options contract where only the buyer is obligated to perform and not the seller (writer), in a futures contract both the buyer and the seller are required to perform the contract. Accordingly, both the buyer and the seller are required to put in the initial margins. The initial margin is also known as the performance margin and is usually 5 to 155 of the purchase price of the contract.

The margin is set by the stock exchange keeping in view the volume of business and the size of transactions a well as operative risks of the market in general.
The initial margin is the first line of defense for the clearing house. This protection is further reinforced by prescribing maintenance margin.

Maintenance Margin

In order to start dealings with a brokerage firm for buying and selling futures, the first requirement for the investor is to open an account with the firm. This account, called the equity account, has to be kept separate from any other account including the margin accounts. Maintenance margin is the margin required to be kept by the investor in the equity account equal to or more than a specified percentage of the amount kept as initial margin. Normally, the deposit in the equity account is equal to or more than 75% to 80% of the initial margin.

In case this requirement is not met, the investor is advised to deposit cash to make up the shortfall. If the investor does not respond, then the broker will close out the investor’s position by entering a reversing trade in the investor’s account.


------------------------------
Example
A buyer buys a futures contract @ Rs. 50 per share for 500 shares from a seller. Both make a deposit of Rs. 2,500, being 10% of the total investment of Rs. 25.000 towards the initial margin.

The next day, the stock price rises to Rs. 52 per share. The equity of the buyer increases to Rs. 3,500 and that of the seller decreases to Rs. 1,500. As the maintenance margin is required to be maintained at 80% of the initial margin, the buyer and the seller are required to have a minimum equity of Rs. 2,00 everyday. The buyer has a surplus of Rs. 1,500 and he has the liberty of withdrawing this sum. The seller, on the other hand, is short of Rs. 500 and would be called upon to make up the shortfall by depositing cash. However, if the seller is unable to pay, the broker would enter a reversing trade by purchasing a future of the same expiration.

--------------------------------
Hey buddy,

Please check attachment for Details of daily Margin applicable for F&O Segment (F&O) For 18.04.2016, so please download and check it.
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