Variation Margin Definition

The broker, or clearing member, must take all these positions into account, and then submit funds to the clearing houses which covers the risk taken by all their trades. Once the balance in the trading account is below the threshold, the broker makes a call for the top-up to the octafx review extent of the initial margin. Hence, the amount required to convert the margin balance equivalent to the initial margin is the variation margin. The variation margin is only payable at the time when the balance of the trading account reached below the maintenance margin.

1. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear), with exception for mortgage and home lending related products.
2. This margin functions as collateral against the amount borrowed by the investor.
3. It’s important to note that variation margin is different from the initial margin, which is the upfront collateral required when opening a derivatives position.
4. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools.
5. The funds requested in the margin call bring the trading balance equal to the initial margin amount.
6. Receiving funds under variation margin is a more excellent help for them, or they could go bankrupt as the default risk would have been much higher without any variation margin/collateral.

This means that the broker must have $500 in his account at all times to make trades. Maintenance margin is an important factor to consider while calculating variation margin. umarkets review It refers to the amount of money an investor must keep in his margin account when trading stocks. This requirement gives the investor the ability to borrow from a brokerage.

Real-world examples of variation margin

The futures contract is to sell and purchase the 50 kg of Apple precisely after six months for a pre-agreed price of USD 500. The initial margin for this future contract is USD 50, and the maintenance margin mercatox exchange reviews is USD 30. The variation margin acts as collateral for the successful execution of the derivative contract. It helps to protect the interest of the party gaining the benefit of entering into the contract.

Understanding variation margin in futures trading

While the initial margin serves as a security deposit to cover potential future losses, the variation margin reflects the daily changes in the value of the open position. If the balance remains between the initial margin and maintenance margin, there is no obligation to pay any margin. However, once the balance reached below the maintenance margin the trader has to top to the threshold of the initial margin. This calculation ensures that both parties are treated fairly and are protected from potential losses resulting from fluctuations in the market value of the asset. It’s important to note that variation margin is different from the initial margin, which is the upfront collateral required when opening a derivatives position.

How to Trade Dow Jones Futures Contracts

We hope this post has provided you with a clear understanding of what variation margin is, how it is calculated, and some practical examples to bring the concept to life. Remember, variation margin plays a significant role in maintaining stability and fairness in financial markets. In derivatives trading, such as futures and options contracts, the value of a position changes daily due to market price movements. The initial margin is the amount agreed by the traders while entering into the futures contract. Now, imagine that a broker has thousands of traders, all in different positions and both making and losing money.

Variation margin is paid by clearing members on a daily or intraday basis to reduce the exposure created by carrying high risk positions. For example, if a trader buys one futures contract, the initial margin on that contract may be $3,000. This is the amount of capital they need to have in their account to take the trade. The amount needed to bring the account to an acceptable level in order to ensure future trades is known as variation margin. On the contract, the initial margin, which is the minimum capital required in order to execute a trade, is $5,000. It means that if the total account balance falls to $4,000, the trader is required to top the account back up to $5,000.

It must be sustained by liquid funds so that it can be used as collateral in case of future losses. If the price of ABC falls to $7, then the $300 in losses in the trade are deducted from the initial margin account. This means that initial margin account balance is now $200, which is below the $300 maintenance margin amount specified earlier.