From the course: Derivatives Fundamentals

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In-depth example of futures contract margins

In-depth example of futures contract margins

From the course: Derivatives Fundamentals

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In-depth example of futures contract margins

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- [Instructor] Okay, so let's look at this in a bit more detail, and then we're going to move to Excel and build a small working model that actually calculates the margins for us. The exposure for both counterparties on the contract is $500,000. We get that by taking the Futures Contract price of $50 a barrel times 1,000 barrels per contract, and then multiply that by 10 contracts. The Tick value, which we've already talked about, is 1 cent per barrel, but we also know that each contract is 1,000 barrels, which means the value of the contract moves in increments of $10, but because we have 10 contracts, really, the value of our contracts is moving in increments of $100. Now let's remind ourselves of the margins. Each counterparty will need to deposit with the exchange $5,000 per contract, but because there are 10 contracts, the counterparties need to deposit $50,000 each with the exchange. Each counterparty also needs to make sure that their margin account at the exchange never drops…

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