Daily settlement of futures
1. The idea
A futures contract, as in Level 1, is a forward with standard terms, traded on an exchange. The exchange’s clearing house is the other side of every trade, and gains and losses are paid every day until delivery. Each evening the exchange takes the change in the futures price since the previous evening and moves it between the buyers’ and the sellers’ margin accounts. An account opens with the initial margin. When losses push the balance below the maintenance margin, a margin call asks for money, the variation margin, to bring it back up to the initial margin:
\[ \text{gain on day } t = (F_t - F_{t-1}) \times N \times Q, \]
where \(F_t\) is the futures price at the close of day \(t\) and \(F_{t-1}\) at the close of the day before, \(N\) the number of contracts and \(Q\) the units per contract; for a sold position the gain has the opposite sign. The variation margin is the initial margin minus the balance. Both margins are per contract, so multiply them by \(N\).
2. Try it
If an answer is wrong, we will see what went wrong and how to fix it.
3. The margin account, day by day
In the question, we hold 3 contracts of 100 ounces, so each $1 change in the futures price moves $300 into or out of our account.
Now step through five days of the same account. A day with a margin call is marked.
The account opens at the initial margin, $7,500 a contract, so $22,500. On day 2 the balance falls to $13,500, below the maintenance margin of \(3 \times \$5{,}500 = \$16{,}500\). That brings a margin call, and we pay in $9,000 of variation margin to bring the account back to $22,500. On day 4 the balance falls to $19,500, which is not below $16,500, so there is no call.
4. One worked example, then your turn
The worked example is a sold position with a margin call on both days.
Now one with hints, one step at a time.
And one on your own.
5. Practice
Each question has new numbers, for a bought or a sold position. You master the skill when you get three right in a row, with at least one right answer with a margin call on day 2 and one without. You can always open the solution, but then that question does not count.
6. Coming back to it
When you have mastered a skill, it comes back on the start page for a short review after 1 day. After each right answer the next review comes later: after 3, 7, 14 and then 30 days. After a wrong one, the reviews start again at 1 day.
This skill: