Futures margin calls: the price that brings one
1. The idea
As daily settlement of futures showed, a futures account starts at the initial margin, and each day’s gain or loss is added to it. When the balance falls below the maintenance margin, a margin call asks for enough to bring it back to the initial margin. So the account can lose the initial margin less the maintenance margin; any further loss brings a call. Spread over all the units held, that loss is a change in the futures price:
\[ \text{price change} = \frac{(\text{initial} - \text{maintenance}) \times N}{N \times Q}, \]
where \(N\) is the number of contracts and \(Q\) the units in one contract, with both margins per contract. A buyer of futures loses when the price falls, and a seller when it rises. The other way round, any balance above the initial margin can be taken out: an amount \(A\) can be withdrawn once the account has gained \(A\), a price change of \(A/(N \times Q)\).
An example. We sell one corn futures contract on 5,000 bushels at $4.80 a bushel, with an initial margin of $2,300 and a maintenance margin of $1,800. The account can lose $500, which is \(500/5{,}000 = \$0.10\) a bushel: at $4.90 the balance is at the maintenance margin, and any further rise brings a margin call. We can take out $1,000 once the account has gained it, when the price falls by \(1{,}000/5{,}000 = \$0.20\), to $4.60.
Some questions say the call comes when the balance reaches the maintenance margin rather than when it falls below it. The price to find is the same boundary either way.
2. Try it
If an answer is wrong, we will see what went wrong and how to fix it.
3. The account on a chart
First, the loss the account can take before a call.
Now move the futures price. The balance falls with the price. Where it meets the maintenance margin is the boundary: any further fall brings a margin call.
4. One worked example, then your turn
The worked example is a seller of futures.
Now a withdrawal, with hints, one step at a time.
And one on your own.
5. Practice
Each question has new numbers. You master the skill when you get three right in a row, with at least one right answer for a margin call and one for a withdrawal. 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: