Finance School of management An lllustration You place an order On August 5, the futures price closes 7/4 cents per to take a long bushel lower position in a You have lost 7 /4 cents*5,000 bushels=$362.50 September wheat that day futures contract on The broker takes that amount out of your account August 4, 1991 and transfers it to the future exchange, which The broker requires transfers it to one of the parties who was on the short side of the contract (marking to market) you to deposit an initial margin of o If you do not have enough money in your account to meet the margin requirement (variation $1, 500 in your maintenance margin), you'll receive a margin call account from the broker asking you to add money If you do not respond immediately then the broker liquidates your position at the prevailing market price uesTc7 Finance School of Management An Illustration ❖ You place an order to take a long position in a September wheat futures contract on August 4, 1991 ❖ The broker requires you to deposit an initial margin of $1,500 in your account ❖ On August 5, the futures price closes 71 /4 cents per bushel lower ❖ You have lost 71 /4 cents*5,000 bushels=$362.50 that day ❖ The broker takes that amount out of your account and transfers it to the future exchange, which transfers it to one of the parties who was on the short side of the contract (marking to market) ❖ If you do not have enough money in your account to meet the margin requirement (variation / maintenance margin), you ’ll receive a margin call from the broker asking you to add money ❖ If you do not respond immediately, then the broker liquidates your position at the prevailing market price