Margin Types, Margin Calls, and Cross Versus Isolated Risk
Summary
The article explains how margin supports leveraged derivatives trading and describes initial, maintenance, variation, available, and risk margin. Initial margin is collateral required to open a position; maintenance margin is the lower threshold that must be sustained. If losses reduce equity below that threshold, traders may need to add collateral or face liquidation. Variation margin accounts for the gap between required and current margin, while available margin represents equity available for new trades.
It compares isolated margin, where collateral is assigned to an individual position and potential loss is limited to that allocation, with cross margin, where positions sharing a settlement currency draw on a common pool. A hedged long and short example illustrates how offsets can affect margin needs. The article also gives a general opening-margin formula and describes real-time settlement. These mechanics and platform details may differ across exchanges and products; the piece is an educational overview with substantial promotional material, and does not quantify liquidation probabilities or compare venues independently.
Key ideas
- Initial margin is the collateral needed to open a position, while maintenance margin is the minimum equity needed to keep it open.
- A margin call can require additional collateral, and failure to meet the requirement can lead to liquidation.
- Isolated margin confines collateral to a position, while cross margin shares equity among eligible positions.
- Hedged positions may reduce exposure, but the margin treatment depends on the exchange and settlement currency.
- Leverage increases buying power while also increasing the risk of losses and forced liquidation.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.