jawz

The settlement price for a futures contract is:

A) an average of the trade prices during the ‘closing period’.

B) the price of the last trade of a futures contract at the end of the trading day.

C) the price of the asset in the future for all trades made in the same day.

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The margin adjustments are made based on the settlement price, which is calculated as the average trade price over a specific closing period at the end of the trading day. The length of the closing period is set by the exchange.

jawz

If the margin balance in a futures account with a long position goes below the maintenance margin amount:

A) a margin deposit equal to the maintenance margin is required within two business days.

B) a deposit is required to return the account margin to the initial margin level.

C) a deposit is required which will bring the account to the maintenance margin level.

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Once account margin (based on the daily settlement price) falls below the maintenance margin level, it must be returned to the initial margin level, regardless of subsequent price changes.

jawz

If the balance in a trader’s account falls below the maintenance margin level, the trader will have to deposit additional funds into the account. The additional funds required is called the:

A) margin call.

B) initial margin.

C) variation margin.

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If the margin balance falls below a specified level (the maintenance margin), additional capital (the variation margin) must be deposited in the account. Initial margin is the capital that must be in the trader’s account before the initiation of the margin trade.

jawz

It is April 15, and a trader is entered into a short position in two soybean meal futures contracts. The contracts expire on August 15, and call for the delivery of 100 tons of soybean meal each. Further, because this is a futures position, it requires the posting of a $3,000 initial margin and a $1,500 maintenance margin per contract. For simplicity, however, assume that the account is marked to market on a monthly basis. Assume the following represent the contract delivery prices (in dollars per ton) that prevail on each settlement date:

April 15 (initiation)	173.00
May 15	179.75
June 15	189.00
July 15	182.50
August 15 (delivery)	174.25

What is the equity value of the margin account on the May 15 settlement date, including any additional equity that is required to meet a margin call?

A) $1,350.

B) $2,300.

C) $4,650.

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Use the following steps to calculate the margin account balance as of May 15.
At initiation: (Beginning Balance, April 15)

Initial margin × number of contracts = 3,000 × 2 = 6,000
Maintenance margin × number of contracts = 1,500 × 2 = 3,000

As of May 15: (Ending contract price per ton − beginning contract price per ton ) × tons per contract × # contracts = (179.75 − 173.00) × 100 × 2 = 1,350
Since the trader is short, this amount is subtracted from the beginning margin balance, or 6,000 − 1,350 = 4,650.

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Based on the May 15 settlement date, which of the following is most accurate?

A) Since the equity value of the margin account is above the initial margin, the trader can withdraw $1,350.

B) Since the equity value of the margin account is below the maintenance margin, a variation margin is called to restore the equity value of the account to it's initial level.

C) No margin call or disbursement occurs.

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As of May 15, the margin balance is $4,650 (see solution to previous question). Since this is below the initial margin of $6,000 (both contracts), but still above the maintenance margin of $3,000, (for both contracts) no action is required.
There are three types of margin. The first deposit is called the initial margin. Initial margin must be posted before any trading takes place. Initial margin is fairly low and equals about one day’s maximum price fluctuation. The margin requirement is low because at the end of every day there is a daily settlement process called marking-the-account-to-market. In marking-to-market, any losses for the day are removed from the trader’s account and any gains are added to the trader’s account. If the margin balance in the trader’s account falls below a certain level (called the maintenance margin), the trader will get a margin call and have to deposit more money (called the variation margin) into the account to bring the account back up to the initial margin level.

jawz

When a futures trader receives a margin call what must he or she do to bring the position up to the initial margin? The futures trader must:

A) deposit variation margin.

B) sell stock to cover the margin call.

C) deposit maintenance margin.

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When a futures trader receives a margin call, he/she must deposit variation margin to bring the account up to the initial margin value.

jawz

The money added to a margin account to bring the account back up to the required level is known as the:

A) variation margin.

B) daily settlement.

C) maintenance margin.

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The money added to a margin account to bring the account back up to the required level is known as the variation margin. The minimum allowed in the account is called the maintenance margin. The daily settlement process requires marking-to-market each day.

jawz

In the trading of futures contracts, the role of the clearinghouse is to:

A) guarantee that all obligations by traders, as set forth in the contract, will be honored.

B) stabilize the market price fluctuations of the underlying commodity.

C) maintain private insurance that can be used to provide funds if a trader defaults.

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The clearinghouse does not originate trades, it acts as the opposite party to all trades. In other words, it is the buyer to every seller and the seller to every buyer. This action guarantees that all obligations under the terms of the contract will be fulfilled.

jawz

Which of the following statements about futures margin is least accurate?

A) Initial margin must be posted to a futures account within three days after the first trade.

B) The initial margin on a contract approximately equals the maximum daily price fluctuation of the contract.

C) If the margin account balance falls below the maintenance margin level, the trader must bring the account back up to the initial margin level.

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Initial margin must be posted before trading.

jawz

Which of the following statements about futures contracts is least accurate?

A) Offsetting trades rather than exchanges for physicals are used to close most futures contracts.

B) The futures clearinghouse allows traders to reverse their positions without having to contact the other side of the initial trade.

C) To safeguard the clearinghouse, the exchange requires traders to post margin and settle their accounts on a weekly basis.

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Each exchange has a clearinghouse. The clearinghouse guarantees that traders in the futures market will honor their obligations. The clearinghouse does this by splitting each trade once it is made and acting as the opposite side of each position. To safeguard the clearinghouse, the exchange requires traders to post margin and settle their accounts on a daily basis. Before trading, the trader must deposit funds (called margin) with their broker (who, in return, will post margin with the clearinghouse). The purpose of margin is to ensure that traders will perform their contractual obligations. Margin can be posted in cash, bank letters of credit, or in T-Bills.
The clearinghouse acts as the buyer to every seller and the seller to every buyer. By doing this, the clearinghouse allows either side of the trade to reverse positions later without having to contact the other side of the initial trade. This allows traders to enter the market knowing that they will be able to reverse their position any time that they want. Traders are also freed from having to worry about the other side of the trade defaulting, since the other side of their trade is now the clearinghouse. In the history of U.S. futures trading, the clearinghouse has never defaulted.
Explanations for other choices:
A reverse, or offsetting, trade in the futures market is how most futures positions are settled.  Since the other side of your position is held by the clearinghouse, if you make an exact opposite trade (maturity, quantity, and good) to your current position, the clearinghouse will net your positions out, leaving you with a zero balance.
Listed below is additional information contrasting futures and forwards:

• Forwards are private contracts and do not trade on an organized exchange. Futures contracts trade on organized exchanges.
• Forwards are unique contracts satisfying the needs of the parties involved. Futures contracts are highly standardized. A futures contract specifies the quantity, quality, delivery date, and delivery mechanism.
• Forwards have default risk. The seller may not deliver, and the buyer may not accept delivery. With futures contracts, performance is guaranteed by the exchange’s clearinghouse.
• Forwards require no cash transactions until the delivery date. Futures contracts require that traders post margin money to trade. Margin is good faith money that supports the trader’s promise to fulfill their obligation.
• Forward contracts are usually not regulated. The government regulates futures markets.

burning0spear

In commodity trading, the exchange removes any daily losses from a trader’s account and adds any gains to the trader’s account. This process is known as:

A) initial margin.

B) variation margin.

C) marking to market.

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To safeguard the clearinghouse, commodity exchanges require traders to settle their accounts on a daily basis. Marking to market is when any loss for the day is deducted from the trader’s account, and any gains are added to the account.