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Margin requirements play a crucial role in ensuring the stability and efficiency markets, particularly in the context of trading leveraged instruments such as futures, options, and other derivatives. Initial and maintenance margins serve as risk management tools that protect market participants and platforms from potential losses due to severe adverse market movements.
Initial margin Refers to the minimum amount of collateral that traders must deposit with their exchange to open a leveraged position. This deposit serves as a safety buffer, ensuring that traders can meet their obligations.
Calculation: The initial margin is typically calculated as a percentage of the total value of the position. This percentage varies depending on the traders selected leverage.
If a trader wants to open a $100,000 position with a 25x leverage modifier, they would need to deposit $5,000 as collateral.
Maintenance Margin The maintenance margin is the minimum amount of equity that traders must maintain in their account to keep their leveraged positions open. If the account balance falls below the maintenance margin, traders may face a margin call, requiring them to either deposit additional funds or close some or all of their positions to meet the margin requirements.
Calculation Similar to the initial margin, the maintenance margin is calculated as a percentage of the total value of the position. This percentage is usually lower than the initial margin requirement, allowing for some fluctuations in the market value of the position.
For instance, if the maintenance margin is set at 150 bps or 1.5% for a $100,000 position with $5000 in initial margin, the trader must maintain an account balance of at least $1,500 to avoid a margin call.