A margin is an amount of cash
that is paid to or received from a stock exchange clearing house
in connection with futures
trading. This can be one of the following:
- Initial margin
This is the ante or deposit that is required in order to trade a futures contract. Initial margin is the way in which the exchange protects itself against bad debts relating to the futures contract, usually defaulting on variation margin payments (see below). Initial margins are calculated based on the current selling price and the market risk.
The initial margin is refunded at the time the futures contract expires.
- Variation Margin
A futures contract can be to buy x or to sell x at some future date. Let us say, you have undertaken to buy x - i.e. you are betting that the price of x will rise. If the price moves in your favour, you receive a variation margin payment from the exchange. If the price falls, you are expected to pay a variation margin to the exchange, and to settle in 24 hours (T+1 settlement). This is called a margin call.
This process of adjusting for price movements happens on a daily basis, and is called marking to market.
The price may well be volatile, and there may be many payments to and fro for a given futures contract.