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Current time:0:00Total duration:3:39

Video transcript

let's think a little bit about how margin works for futures contracts so let's say that the terms of the contract are a thousand pounds of apples for delivery on November 15th and we're assuming that this is some date in the future and right now in the futures exchange the market delivery price so the price at which the apples will change hand in the future is $200 $200 and I've written here what the exchange specifies for the initial and maintenance margin we'll talk about that more in a second but this essentially means that both the buyer and the seller for the initial margin have to put up $20 sometimes it'll be specified as an absolute dollar amount like I've just done sometimes it might be a percentage of the actual delivery price so they both have to put up $20 and they if this guy has agreed to buy a thousand pounds of apples from this guy on November 15th for $200 so it's essentially 20 cents a pound now let's say that a day goes by and the next day these guys have this contract this price right here is fixed in their minds but let's say the next day this same contract between two other parties between two other parties the same contract trades with the delivery price of one hundred and ninety dollars now all of a sudden this guy over here feels silly he's like man I'm agreeing to buy something for $200 in the future which some other dude all of a sudden has agreed to buy for $190 this guy over here feels really smart he agreed to sell something for $200 the day before and now people are selling it for $190 so he's kind of ten dollars better than the people participating in the futures market today the way mark-to-market works with futures contracts is that the exchange says well you know what I'm afraid that this guy if things keep moving against him he's not going to even want to he's never not even going to want to put up the money to buy it $200 if he can buy in the market at $190 or something lower so I'm going to I'm going to reset their futures contract to a delivery price of $190 but to make things fair this guy is going to be ten dollars in the hole he's getting a ten dollar deal if I take the if I take the delivery pressure 200 to $190 I need to take $10 from this guy because he's getting a $10 better deal so from his margin account I take it from $20 I take it from $20 to $10 and then I place the $10 in this guy's margin account if he's going to get a $10 less of a good price on the delivery date then let me give him the $10 right now so his margin account will go to $30 now this number was 18 17 16 or 15 this guy wouldn't have to do anything but right here he has triggered his maintenance margin and actually he's right at our maintenance margin so let's say that he goes that the next day this happens a little bit more it goes down to 185 and we have to do the process again this guy loses $5 he goes down to $5 this guy will be given $5 so he goes to $35 in order in order for him to essentially reset the futures price he's been given another $5 now this guy has only $5 in his mate in his margin account and the maintenance margin is $10 so it triggers a margin call and this guy's got to find someplace to put another $15 in his margin call every time you get below the maintenance margin it triggers a margin call and you have to refill your margin account to the initial margin so he has to add $15 so he gets back to $20