Question
An investor enters into a long position in one Nifty
Future contract (Lot Size = 50) at a price of ₹24,000. The broker mandates an Initial Margin of 10% and a Maintenance Margin of 8%. If the market price falls to ₹23,400 on Day 1, what is the Mark-to-Market (MTM) impact and the status of the margin account?Solution
Contract Value = 24,000 x 50 = Rs.12,00,000 Initial Margin = 10% of 12,00,000 = Rs.1,20,000 Maintenance Margin = 8% of 12,00,000 = Rs.96,000 MTM Loss = (24,000−23,400) × 50 = Rs.30,000 Therefore, New Margin Balance = Initial margin – MTM Loss = 1,20,000−30,000 = Rs. 90,000 Since new margin banlance of Rs.90,000 is below the Maintenance Margin of Rs. 96,000, a margin call is triggered. The investor must deposit funds to bring it back to the Initial Margin level of Rs.1,20,000. Note - Initial margin is the upfront deposit required to open a leveraged trading position, set as a percentage of the total contract value. Maintenance margin is the minimum, lower amount of equity that must remain in the account to keep the position open. Falling below this level triggers a margin call whereby the investor must refill it back to the Initial Margin (not just back to the maintenance level).
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