What is Margin?
In simple language, a BUYER and a SELLER have to deposit some TOKEN money with the broker before trading the contract. This token money is some % of the entire contract value. This token money is called the initial margin. INITIAL MARGIN =SPAN MARGIN + EXPOSURE MARGIN
What is the Initial margin?
What is the Span margin?
SPAN margin is more important for a trader because if this margin remains less in your account then the exchange can also impose a penalty on you if you do not deposit more cash.
SPAN margin is always calculated on the basis of volatility, higher the volatility, higher the margin, and lower the volatility, lower the margin. Another term we hear in FUTURES trading is “M2M”.
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| Span Margin |
Let me try to explain to you through an example what role margin and M2M play in FUTURES trading.
First, the entire contract value became 500 * 2000 (purchase price) = 1,000,000 (ten lakh rupees).
SPAN MARGIN = 10 % * 1,000,000 =1,00,000
EXPOSURE MARGIN = 2 %*1,000,000 =20,000
Total Rs 1,20,000 you will have to deposit if you want to trade 1 lot in Reliance.
How much was the profit in this trade 2100 -2000 =100 *500 =50,000
Now there would always be some difference in the closing price between October 1 and October 10 and margin and M2M are calculated on the basis of this difference.
One more thing that should always be kept in mind while trading in FUTURES is that the closing price is always considered the buying price for the next day, meaning your profit/loss is calculated on the basis of the closing price only. Based on your initial purchase price.
I have made an Excel sheet taking the example of Reliance, if you look at it carefully you will understand everything. If you don’t understand in one go, watch it twice or thrice.
Now, on that day Reliance was closed, the total value was Rs 1,00,5000 in 2010 RS and the total margin was
Rs 1,20,600, the margin increased to Rs 600, because at the time of trading our margin was Rs 1,20,000.
Now because the trader is getting a profit of 5000 rs on M2M, this 5000 rs is deposited in the trader’s account on the same day. TOTAL CASH BALANCE in the trader’s account was Rs 1,25,000.
Now it is clear here that CASH BALANCE is more than SPAN MARGIN so the trader does not need to invest extra money. Now the closing price (2010) will be taken into consideration to calculate the P&L for the next day.
2 October
The next day Reliance closed at Rs 5 less than the previous day’s closing price. Here our M2M is 2500 RS. Now since it closed at Rs 5 less than yesterday’s closing price, Rs 2500 will be reduced from the CASH BALANCE. The total margin calculated is still less than the cash balance, so the trader still does not have any problem.
3 October
On 3rd October there was -7500 M2M in Reliance because on 2nd October Reliance had closed at 2005 and on 3rd October it had closed at 1990 so 1990 – 2005 = -15. Now this -7500 RS will be deducted from the trader’s CASH BALANCE and the thing to be noted is that here the margin is 119400 and the CASH BALANCE is 112500, so the difference of Rs 6900 will have to be deposited by the trader, this is called margin call. Otherwise, the position will be squared off by the broker.
On October 10, Reliance was sold at Rs 2100, which is Rs 50 more than the previous day’s closing price, while on October 10, M2M was sold at Rs 25000. FINAL CASH BALANCE is 145000. These 25000rs are very quickly deposited into the trader’s account by the broker. The special things that I tried to tell through this blog were SPAN MARGIN, M2M, and MARGIN CALL.
I hope that with my efforts you have understood what SPAN MARGIN, M2M, and MARGIN CALL are. I will continue to write blogs on many topics related to trading. Please share my blogs as much as you can.
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