Futures Contracts Margins and How they Work

The investor deposits $1350 in an account with his brokerage firm to allocate the order.

If in the next day gold closes at $1 per ounce, the margin account of the investor is debited (deducted) with $100 for the loss of the contract. A movement of $1 gives you a result of $100 because each contract equals 100 troy ounces. Now your balance account has $1250 ($1350 - $100). If gold declines in $3 the next day, the balance account will fall to $950 ($1250 - $300). This is below the maintenance margin which is $1000 per contract.

The investor receives a margin call to deposit additional funds. The investor must deposit more funds to keep the gold futures contract or liquidate the position.

If the investor would decide to deposit more funds, a deposit of $400 will be required to return the balance to the initial margin requirement of $1350.

There are many points that should be taken into account when negotiating with futures contract, which differ in negotiating stocks.

1. Due that margins are only a small fraction of the futures contract value, these transactions are highly leveraged (the ability to control a large account value with a small investment). A small change in price of commodity has as result a great change in the total value  of the contract. This means losses in small movements with the underlying commodity or financial security.
2. Profits and losses with futures accounts succeed each other daily. This process is denominated as marking to the market  in which the futures accounts are valued at closing of each day of negotiations.  Marking to the market is a process in which futures contract accounts are adjusted so as to reflect the real value in the market at end days negotiation.
3. When the level of the account falls below the maintenance margin amount, a margin call is issued. If additional funds are not deposited in the account to reestablish the required margin, the futures position is liquidated.
4. Just a small percentage of futures contracts are kept to maturity. Most futures position are closed out before maturity. To close out a position, investors reverts the position.

For example, if an investor goes short in a corn futures contract, the broker is instructed by the investor to go long in the corn futures contract, which cancels the position.

Exchanges impose daily limits allowed price shifts for futures contracts in a day.

The daily unit  is the maximum increase and reduction in price shifts allowed during a day for commodity futures price in relation to the price set the day before negotiation. If the commodity futures contract falls below an allowable daily limit, a larger reduction is not allowed during the rest of day. The same applies if prices increase above the permitted daily price limit.

Negotiating with these contracts can take place even if negotiating at price limits or within the range of the daily negotiation set for that day. For example, the daily allowable limit for pork belly contracts is currently of 3 cents per pound up or down the previous day´s closing price. Thus if the pork belly contract falls 3 cents in relation to the previous day´s price and there are other flaws in pork belly prices , the price will not fall below the 3 cents limit.

If there are no buyers at this price limit, no transaction will be done.

The reasons for establishing these daily limits is to limit the potentially disruptive financial effects of great movements in prices of commodity futures and to keep organized markets