How Futures Leverage, Daily Marking, and Margin Calls Affect P&L
Summary
The document walks through a numerical example of a long futures position whose daily gains and losses are settled in cash. Because the position controls many units while the trader posts only an initial margin deposit, a modest percentage move in the futures price can produce a much larger percentage change in the account balance. Daily mark-to-market updates that balance as prices move.
The example also shows how losses can exhaust the initial deposit and create an amount owed, while maintenance margin rules can require additional funds before that point. Posting collateral equal to the full notional value would remove the need for those top-ups in this example, though it would not change the position’s underlying price exposure. The explanation is illustrative rather than a general margin specification; actual requirements and cash flows depend on contract and exchange rules. It flags a typo in the source table’s final balance.
Key ideas
- Futures gains and losses are settled as the contract price changes, affecting the margin account each day.
- A relatively small price move can create a large account return when the position is leveraged.
- If losses exceed posted funds, the trader may owe additional money.
- Maintenance margin can trigger a deposit before the account is depleted, and greater collateral reduces top-up needs.
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Full text
# Futures contracts # Futures contracts In a Text book the following is giving as an example. Can someone plz explain the process? ## Answer by Alex C (score 1) https://quant.stackexchange.com/a/30625 This is a simple numerical example to illustrate the power and the danger of the leverage implicit in futures contracts. Each row in the table represents one day. On the first day the futures price is USD 55/unit. On the second day the price rises to 60/unit. Since you are long futures on 10,000 units you have made (60-55)*10000 = USD 50,000. This amount is paid to you in cash at the end of the day so your account balance goes from 55,000 to 55,000+50,000= 105,000. (In 1 day your balance more than doubled! While the price only increased approx 10%). And so on and so forth on every successive day; your A/C balance fluctuates based on changes in the price. Unfortunately it goes negative, at that point you owe the money (both legally and ethically); so it's possible to lose more than your initial investment. The price went from 55 to 47 so you lost (47-55)*10,000 = USD 80,000 made up as follows: 55,000 initial investment plus 3,250 additional investment plus 21,750 owed at the end (the 21,050 in the last row is a typo!). The exchange requires you to deposit a minimum of 55,000 at the beginning, and to keep the balance to a minimum of 41,250 (which is why you put up 3250 addn'l between the 5th and 6th day), however you can put in more than this if you want; if you put up a full 55*10000 = 550,000 at the beginning (full collateral) you will never have to put up more money. In the example the maximum possible degree of leverage is illustrated.
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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.