Purchasing a margin means that the purchaser is using his personal cash along with the loan provided by the broker to buy securities. On the other hand, the purchased securities are treated as collateral for the loan amount. There are severaltypes of margin requirements that are needed in different conditions. Some of these requirements are the following:
The marketer who is selling an option carries the liability to provide the principal of that particular option whenever it is used. To provide guarantee of the fact that the liability would be fulfilled, a collateral or security is deposited by that marketer. The values of the premium of the liability and that of the premium margin or collateral are the same.
Variation margin is also termed as maintenance margin. This is not a kind of collateral, but an everyday offsetting of gains and losses. The futures exchange performs the role of the counterparty in the contracts and provides some additional facilities to the option holders. The present cost of the futures and the last-day cost of the futures are compared and if there is any kind of upward or downward movement in the positions of the futures, the futures holder pays or receives the amount from the counterparty or the exchange. This process of marked-to-market is also followed for several other derivatives.
Current Liquidating Margin
If any security is sold at present, the cost of that security would be termed as current liquidity value and the collateral that is related to the current liquidation process of the security is known as Current Liquidating Margin. This money is used by the security holder in both short and long position.
The prime reason behind designing the additional margin is to provide appropriate coverage for any kind of fall in the position’s cost on the next trading day.
Last Updated on : 1st July 2013