Derivatives and advanced market conceptsModule 1, lesson 3 of 21
Futures margin and mark-to-market
Initial margin, daily mark-to-market settlement, margin calls, and how a small price move becomes a large percentage gain or loss on the money put up as margin.
In this lesson
- Explain initial margin and why it is only a fraction of contract value.
- Work through daily mark-to-market settlement on a futures position.
- Explain margin calls and what happens if they are not met.
- Calculate a price move's effect as a percentage of margin, and show how losses can exceed margin.
Builds on
- Forwards and futuresMargin is set as a share of the futures contract value explained there.
On this page
In simple terms
When you take a futures position, you do not pay the full contract value. Instead you deposit margin, a fraction of the value, as security. Then, every day, your gains are added to your account and your losses taken out. This daily settlement is called mark-to-market (MTM).
Margin makes futures cheap to enter and dangerous to hold: a small move in the price is a large move relative to your margin.
Initial margin
Initial margin is set by the exchange's clearing corporation for each contract, based on how much the price might move in a day. Margin rules and percentages are set under SEBI's framework and change over time, so the examples use made-up figures.
| Contract value (made up): 500 shares × ₹1,000 | ₹5,00,000 |
|---|---|
| Margin assumed for this example: 20% | ₹1,00,000 |
The trader controls ₹5 lakh of exposure with ₹1 lakh: leverage of five times, as the leverage lesson explains.
Daily mark-to-market
Worked example: Four days of a made-up long position
Long one contract of 500 shares bought at ₹1,000, with ₹1,00,000 in the margin account.
| Day | Settlement price | Day's gain or loss | Margin account |
|---|---|---|---|
| Start | ₹1,000 | ₹1,00,000 | |
| 1 | ₹980 | −₹10,000 | ₹90,000 |
| 2 | ₹950 | −₹15,000 | ₹75,000 |
| 3 | ₹990 | +₹20,000 | ₹95,000 |
| 4 | ₹930 | −₹30,000 | ₹65,000 |
After four days, a 7% fall in the price has cost 35% of the margin.
Losses are real cash leaving your account each day, not paper losses waiting for expiry.
Margin calls
If losses push the account below the level the broker and exchange require, you receive a margin call: you must add money, usually within a very short time. If you cannot, the broker can close your position at the market price, locking in the loss, as the margin call entry explains.
Margin calls tend to come at the worst moment: after a sharp fall, when prices are volatile and the trader is under stress.
Small moves, large percentages
| Price move | Effect on contract value of ₹5 lakh | As a share of ₹1 lakh margin |
|---|---|---|
| +2% | +₹10,000 | +10% |
| −5% | −₹25,000 | −25% |
| −10% | −₹50,000 | −50% |
| −20% | −₹1,00,000 | −100% |
A move that would be ordinary for a share over a few days can wipe out most or all of the margin.
Losing more than the margin
Margin is not the maximum loss. If the price falls 22%, from ₹1,000 to ₹780, the loss is:
| Loss: (780 − 1,000) × 500 | −₹1,10,000 |
|---|---|
| Margin deposited | ₹1,00,000 |
| Amount still owed to the broker | ₹10,000 |
This can happen quickly when a price gaps down overnight on bad news, as the gaps lesson explains, before the broker can close the position.
Why it matters
Margin and mark-to-market are why futures losses can be so fast. Thinking in terms of contract value and percentage of margin, rather than the price change alone, shows the real risk of a position before you take it.
Limitations
Real margin systems use several components, change with volatility, and differ between brokers. The examples ignore costs, taxes and interest. Check the current margin requirements with the exchange and broker.
Common mistakes
- Thinking the margin is the maximum loss.
- Judging risk by the price move instead of the move as a share of margin.
- Keeping no spare cash for margin calls.
- Holding positions overnight without allowing for gaps.
Try it yourself
- For a made-up contract worth ₹8 lakh with ₹1.6 lakh margin, calculate the loss as a share of margin for falls of 3%, 10% and 25%.
- Build a five-day mark-to-market table for a short position using prices of your choice.
- Work out the price move that would wipe out the whole margin.
Key takeaways
- Initial margin is a deposit, a fraction of contract value, that the exchange's clearing system requires before you take a futures position.
- Futures gains and losses are settled daily, called mark-to-market. Losses come out of your margin account each day.
- If losses reduce your account below the required level, you face a margin call and must add money quickly, or the broker can close the position.
- Because margin is small relative to contract value, a small percentage move in the price is a large percentage of your margin.
- A large enough move, especially a gap, can produce a loss bigger than the whole margin, and you owe the difference.
Check your understanding
Finished reading?
Your progress is saved only in this browser.
Terms used in this lesson
- Initial margin
- The deposit required before taking a futures or option-selling position, set as a fraction of contract value.
- Mark-to-market
- The daily settlement of gains and losses on a futures position, using that day's settlement price.
- Margin call
- A demand from a broker or lender for more money when a leveraged position falls, failing which the position can be sold.
- Leverage
- Using borrowed money, or products such as futures and options, to take a bigger position than your own money allows, magnifying gains and losses.
Spotted a mistake or something unclear? Report it by email. Here is how corrections work.
This lesson is general education, not investment advice. Examples use made-up or clearly dated figures to explain ideas; they are not recommendations. Read the disclaimer.