Page 24 - Futures Money Machine-Study Session #3

Understanding Futures

Margin Example …

Let's assume we have a speculator who has $10,000 in his/her trading account. The speculator decides to buy
August Crude Oil at $40 per barrel. Each Crude Oil futures contract represents 1,000 barrels and requires an initial
margin of $9,000 and has a maintenance margin level set at $6,500.

Since the speculator’s account is $10,000, which is more than the initial margin requirement, the speculator can
therefore open up one August Crude Oil futures position.

One day later, the price of August Crude Oil drops to $38 a barrel. Our speculator has suffered an open position
loss of $2,000 ($2 x 1000 barrels) and thus their account balance drops to $8,000.

Although the speculator’s balance is now lower than the initial margin requirement, the speculator did not get the
margin call as it is still above the maintenance level of $6,500.

Unfortunately, on the very next day, the price of August Crude Oil crashed further to $35, leading to an additional
$3,000 loss on the speculator’s open Crude Oil position. With only $5,000 left in the speculator’s trading account,
which is below the maintenance level of $6,500, the speculator received a call from his broker asking him/her to
top up their trading account back to the initial level of $9,000 in order to maintain his open Crude Oil position.

This means that if the speculator wishes to stay in the position, he/she will need to deposit an additional $4,000
into their trading account.

Otherwise, if the speculator decides to quit the position, the remaining $5,000 in his/her account will be available
to use for trading once again.