Can someone explain initial margin vs variation margin for futures with a numerical example?
I'm confused about how margin works for futures contracts. I know there's initial margin and variation margin, but how do they interact? When do you get a margin call? A step-by-step example would really help.
Margin for futures contracts is a system of collateral deposits designed to ensure both parties can honor their obligations. Let's walk through a concrete example.
Key Definitions
- Initial Margin: The upfront deposit required when entering a futures position. Set by the exchange/CCP based on historical volatility of the contract.
- Maintenance Margin: The minimum balance that must be maintained in the margin account (typically 70-80% of initial margin).
- Variation Margin: The daily cash transfer reflecting mark-to-market gains or losses.
- Margin Call: Triggered when the account balance drops below the maintenance margin. The trader must restore the balance to the initial margin level.
Worked Example
Fairview Trading goes long 10 WTI crude oil futures at $78.00/barrel. Each contract is 1,000 barrels.
- Initial margin per contract: $6,500
- Maintenance margin per contract: $5,000
- Total initial margin deposited: 10 × $6,500 = $65,000
- Maintenance threshold: 10 × $5,000 = $50,000
| Day | Settlement Price | Daily P&L | Cumulative P&L | Account Balance | Margin Call? |
|---|---|---|---|---|---|
| 0 | $78.00 | — | — | $65,000 | — |
| 1 | $77.20 | -$8,000 | -$8,000 | $57,000 | No |
| 2 | $76.10 | -$11,000 | -$19,000 | $46,000 | Yes |
| 3 | $76.80 | +$7,000 | -$12,000 | $72,000* | No |
*Day 2: Account fell to $46,000 < $50,000 maintenance margin. Fairview must deposit $19,000 to restore to $65,000. New balance entering Day 3: $65,000. Day 3 gain of $7,000 brings it to $72,000.
Important Details for FRM:
- Variation margin is settled daily — unlike a loan where interest accrues, futures gains and losses are realized every day through the margin account.
- Initial margin is not a down payment — it's a performance bond. The full notional ($780,000 in our example) is never exchanged.
- Margin is risk-based — the exchange uses models like SPAN or CME's CORE to set initial margin based on the worst-case 1-day loss at a high confidence level.
- Portfolio margining — offsetting positions (e.g., long crude, short heating oil) may receive margin offsets due to correlation.
For the FRM exam, practice calculating margin calls and understand the difference between gross and net margining. Explore our FRM Part I course for more on market mechanics.
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