Where variation margin, and if the call

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Where individuals trade standardized
contracts that have been defined by the exchange. Example: Chicago Board of
Trade (CBOT) established in 1848, or Chicago Mercantile Exchange (CME)
established 1919 and so on. In such markets, future contracts are widely
exchanged, call options contracts started trading in 1973 first by Chicago
Board Options Exchange (CBOE), put option contracts started trading on the
exchange in 1977.  After agreed between
parties on the trade, it’s handled by the exchange clearinghouse in which role
is to stand between two traders and manage the risks. A clearinghouse acts as
an intermediary in future transactions, guarantying the performance of the
parties involved in the trade. Having a number of members who are concerned with
posting margin, the clearinghouse main task is to keep track of all transactions
that take place during the day, so that it can calculate the net position of
each member. The process by which marginal accounts work is as follows: first
the trader deposit funds in a margin account known as initial margin, at the
end of each day the margin account is adjusted to reflect the trader’s gain or
loss. This process is known as daily settlement. Regardless of the trader’s
position a maintenance margin is to be set to ensure that the balance in the
marginal account never becomes negative. If the balance in the account falls
below maintenance margin the trader receives a marginal call to deposit more
funds into the account to reach an acceptable level. The added funds are known
as a variation margin, and if the call is ignored by the trader the broker
closes out the position. The trader is entitled to withdraw any balance in the
margin account in excess of the initial margin. The author Mr. Amadeo in his
article noticed that “Just 4 percent of the world’s derivatives are traded on
exchanges. These public exchanges set standardized contract terms.
They specify the premiums or discounts on the contract price. This
standardization improves the liquidity of derivatives. It makes them more
or less exchangeable, thus making them more useful for hedging.”

Categories: Trade


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