Ayush bought a futures contract at Rs 120. If, the initial margin is 40% and maintenance margin is 25%, at what price the margin call will be initiated for Ayush?

Solution

The price of the contract is Rs 120. The required initial margin is 120 @ 40% = Rs 48 Required Maintenance Margin is Rs 30. When the price goes down, margin money in the account will be taken in order to give to another party who stands to gain. When the price goes down to 110, the money remaining in the margin account will also come down by 10 i.e (48-10 = 38). But it is still above the limit of the maintenance margin balance. Therefore, when the price of the security goes down to 102, the margin balance will come down to 30 (38-8). Therefore, at 30 the cut-off for maintaining the maintenance margin is reached. Therefore, as per the rules, the investor will get a call for replenishing his margin account to make it to the original level i.e 48. The amount that needs to be brought in order to make it to an original level of initial margin is called variation margin So, at a 102 price, the investor will get a call for margin.