Chapter 02 · Futures contracts
Margin is not the full price
Margin is a good-faith deposit against a larger promise. It is not the price of the future, and it is not a cap on what you can lose. This chapter uses one lot and one bad week to make the difference numerical.
Initial margin and the exposure it supports
The exchange and the clearing corporation set an initial margin so that a sharp ordinary move can be paid for without waiting to chase a client. The figure is a percentage of contract value, and it changes when volatility changes. Treat any percentage in a textbook as stale. Look up the margin the broker actually blocks on the day.
Use a round illustration. One lot is 250 shares. The futures price is ₹1,200. Contract value is 250 × 1,200 = ₹3,00,000. If the margin required that day is 14%, you post about ₹42,000. You control a ₹3 lakh promise with ₹42,000. A 4% adverse move in the future is 0.04 × 3,00,000 = ₹12,000, which is more than a quarter of the margin you posted. A 14% adverse move consumes the margin entirely. Nothing in the contract stops the loss at ₹42,000. If the position is still open, you owe the difference. Margin is a buffer the clearing system insists on, not a stop-loss you secretly own.
Mark-to-market makes the loss leave your account daily
Futures are marked to the day’s settlement price. If the price moves against you, the loss is debited the same day, and your spare margin shrinks. If it shrinks below the maintenance level the broker requires, you receive a margin call: add cash, or the position can be reduced or closed for you. The call is not a suggestion and it does not wait for the price to ‘come back’. The next chapter walks through a three-day mark. The point here is that the ₹42,000 is not a ticket you bought and forgot. It is a live balance.
Leverage is a ratio you choose by accident
Contract value divided by the cash you actually set aside is your leverage. If you post only the ₹42,000, you are at about 7 times. If you set aside ₹1,50,000 and only ₹42,000 of it is blocked, your practical leverage is 2 times, because a bad move has somewhere to be paid from without a forced exit. The exchange does not reward the second choice. Your survival does. Decide the cash you will hold behind the position before you look at the maximum lots the broker will allow. The maximum is a credit limit, not a recommendation.
A small table of the same lot
| Move in the future | Gain or loss on one lot | As a fraction of ₹42,000 margin |
|---|---|---|
| +2% | +₹6,000 | about +14% |
| −2% | −₹6,000 | about −14% |
| −6% | −₹18,000 | about −43% |
| −14% | −₹42,000 | the buffer is gone; further loss is still owed |
The right-hand column is why futures feel fast. The underlying moved 2%. The margin moved about 14%. People describe this as efficiency. It is also the speed at which a thesis you have not finished thinking about becomes a debit.
What to remember
- Exposure is the contract value. Margin is the deposit against it.
- Losses are not capped at the margin. A move larger than the buffer is still your loss.
- Look up the live margin. Printed percentages go stale when volatility changes.
- Choose how much cash sits behind the position. Do not let the broker’s maximum lot count choose it.
- A margin call is settled with cash or with a smaller position, on the day it arrives.