the position by selling the contract. In the case of the investor considered earlier, closingout the position would involve neutralizing the existing contract by selling 200 ounces of gold fordelivery in December.
Table 2.1 illustrates the operation of the margin account for one possible sequence of futuresMechanics of Futures Markets 25
Table 2.1 Operation of margins for a long position in two gold futures contracts.The initial margin is $2,000 per contract, or $4,000 in total, and the maintenancemargin is $1,500 per contract, or $3,000 in total. The contract is entered into on June 5at $400 and closed out on June 26 at $392.30. The numbers in the second column,except the first and the last, represent the futures prices at the close of trading
Futures Daily gain’ Cumuiative gain’ Margin account Margin
price (oss) (loss) balance call
Day (3) (3) (3) (3) (3)400.00 4,000
June5 397.00 (600) (600) 3,400
June 6 396.10 (180) (780) 3,220
June9 398.20 420 (360) 3,640
June 10 397.10 (220) (580) 3,420
June 11 396.70 (80) (660) 3,340
June 12 395.40 (260) (920) 3,080
June 13. 393.30 (420) (1,340) 2,660 1,340
June 16 393.60 60 (1,280) 4,060
June 17 391.80 (360) (1,640) 3,700
June 18 392.70 180 (1,460) 3,880
June 19 387.00 (1,140) (2,600) 2,740 1,260
June 20 387.00 0 (2,600) 4,000
June 23 388.10 220 (2,380) 4,220
June 24 388.70 120 (2,260) 4,340
June 25 391.00 460 (1,800) 4,800
June 26 392.30 260 (1,540) 5,060
prices in the case of the investor considered earlier. The maintenance margin is assumed for thepurpose of the illustration to be $1,500 per contract, or $3,000 in total. On June 13 the balance inthe margin account falls $340 below the maintenance margin level. This drop triggers a margin callfrom the broker for additional $1,340. Table 2.1 assumes that the investor does in fact provide thismargin by the close of trading on June 16. On June 19 the balance in the margin account againfalls below the maintenance margin level, and a margin call for $1,260 is sent out. The investorprovides this margin by the close of trading on June 20. On June 26 the investor decides to closeout the position by selling two contracts. The futures price on that day is $392.30, and the investorhas a cumuiative ioss of $1,540. Note that the investor has excess margin on June 16, 23, 24, and 25.Table 2.1 assumes that the excess is not withdrawn.
Further Details
Many brokers allow an investor to earn interest on the balance in a margin account. The balance inthe account does not therefore represent a true cost, provided that the interest rate is competitivewith what could be earned elsewhere. To satisfy the initial margin requirements (but not sub-sequent margin calls), an investor can sometimes deposit securities with the broker. Treasury billsare usually accepted in lieu of cash at about 90% of their face value. Shares are also sometimes
accepted in lieu of cash—-but at about 50% of their face value.26 CHAPTER 2
 
The effect of the marking to market is that a futures contract is settled daily rather than all at the
end of its life. At the end of each day, the investor’s gain (loss) is added to (subtracted from) the
life. At the end of each day, the investor’s gain (loss) is added to tracted from) themargin account, bringing the value of the contract back to zero. A futures contract is in effectclosed out and rewritten at a new price each day.
Minimum levels for initial and maintenance margins are set by the exchange. Individual brokersmay require greater margins from their clients than those specified by the exchange. However, theycannot require lower margins than those specified by the exchange. Margin levels are determinedby the variability of the price of the underlying asset. The higher this variability, the higher thelly about 75% of the
Margin requirements may depend on the objectives of the trader. A bona fide hedger, such as acompany that produces the commodity on which the futures contract is written, is often subject tolower margin requirements than a speculator. The reason is that there is deemed to be less risk ofdefault. Day trades and spread transactions often give rise to lower margin requirements than dohedge transactions. In a dav trade the trader announces to the broker an intent to close out theposition in the same day. In a spread transaction the trader simultaneously takes a long position ina contract on an asset for one maturity month and a short position in a contract on the same assetfor another maturity month.
Note that margin requirements are the same on short futures positions as they are on longfutures positions. It is just as easy to take a short futures position as it is to take a long one. Thespot market does not have this symmetry. Taking a long position in the spot market involvesbuying the asset for immediate delivery and presents no problems. Taking a short position involvesselling an asset that you do not own. This is a more complex transaction that may or may not bepossible in a particular market. It is discussed further in the next chapter.
       
margin levels. The enance margin is ust { margin.
 
The Clearinghouse and Clearing Margins
The exchange clearinghouse is an adjunct of the exchange and acts as an intermediary in futurestransactions. It guarantees the performance of the parties to each transaction. The clearinghouse hasa number of members. Brokers who are not clearinghouse members themselves must channel theirbusiness through a member. The main task of the clearinghouse is to keep track of all the trans-actions that take place during a day so that it can calculate the net position of each of its members.
Just as an investor is required to maintain a margin account with a broker, a clearinghousemember is required to maintain a Margin account with the clearinghouse. This is known as aclearing margin. The margin accounts for clearinghouse members are adjusted for gains and lossesat the end of each trading day in the same way as are the margin accounts of investors. However, inthe case of the clearinghouse member, there is an original margin, but no maintenance margin.Every day the account balance for each contract must be maintained at an amount equal to theoriginal margin times the number of contracts outstanding. Thus, depending on transactionsduring the day and price movements, the clearinghouse member may have to add funds to itsmargin account at the ond of the day. Alternatively, it may find it can remove funds from theaccount at this time. Brokers who are not clearinghouse members must maintain a margin accountwith a clearinghouse member.
In determining clearing margins, the exchange clearinghouse calculates the number of contractsoutstanding on either a gross or a net basis. The gross basis simply adds the total of all longpositions entered into by clients to the total of all the short positions entered into by clients. Thenet basis allows these to be offset against each other. Suppose a clearinghouse member has twoclients: one with a long position in 20 contracts, the other with a short position in 15 contracts.Mechanics of Futures Markets 27
Gross margining would calculate the clearing margin on the basis of 35 contracts; net marginingwould calculate the clearing margin on the basis of 5 contracts. Most exchanges currently use netmargining.
It should be stressed that the whole purpose of the margining system is to reduce the possibilityof market participants sustaining losses because of defaults. Overall the system has been verysuccessful. Losses arising from defaults in contracts at major exchanges have been almostnonexistent.
2.5 NEWSPAPER QUOTES
 
 
Many newspapers carry futures quotations. The Wall Street Journal’s futures quotations cancurrently be found in the Money and Investing section. Table 2.2 shows the quotations forcommodities as they appeared in the Wall Street Journal of Friday, March 16, 2001. The quotesrefer to the trading that took place on the previous day (i.e., Thursday, March 15, 2001). Thequotations for index futures and currency futures are given in Chapter 3. The quotations forinterest rate futures are given in Chapter 5.
The asset underlying the futures contract, the exchange that the contract is traded on, thecontract size, and how the price is quoted are all shown at the top of each section in Table 2.2.The first asset is corn, traded on the Chicago Board of Trade. The contract size is 5,000 bushels,and the price is quoted in cents per bushel. The months in which particular contracts are tradedare shown in the first column. Corn contracts with maturities in May 2001, July 2001, September2001, December 2001, March 2002, May 2002, July 2002, and December 2002 were traded onMarch 15, 2001.
Des =rrices
The first three numbers in each row show the opening price, the highest price achieved in tradingduring the day, and the lowest price achieved in trading during the day. The opening price isrepresentative of the prices at which contracts were trading immediately after the opening bell. ForMay 2001 corn on March 15, 2001, the opening price was 2174 cents per bushel and, during theday, the price traded between 2104 and 2173 cents.
Settlement Price
The fourth number is the settlement price. This is the average of the prices at which the contracttraded immediately before the bell signaling the end of trading for the day. The fifth number isthe change in the settlement price from the previous day. In the case of the May 2001 cornfutures contract, the settlement price was 2103 cents on March 15, 2001, down 7 cents fromMarch 14, 2001.
The settlement price is important, because it is used for calculating daily gains and losses andmargin requirements. In the case of the May 2001 corn futures, an investor with a long positionin one contract would find his or her margin account balance reduced by $350 (= 5,000 x7 cents) between March 14, 2001, and March 15, 2001. Similarly, an investor with a shortposition in one contract would find that the margin balance increased by $350 between these twodates.CHAPTER 2
 
Table 2.2. Commodity futures quotes from the Wall Street Journal on March 16, 2001
 
 
FUTURES PRICES
 
Thursday, March 15, 2001
Open interest Reflects Previous Trading Day.
GRAINS AND OILSEEDS
OPEN HIGH LOW SETTLE CHANGE HIGH LOWCorn (CBT) 5,000 bu.; cents per bu.May 2t7h 217% 210% 210% 7
- 28242 2062duly 2254 225% 2184 218% - Bn 2872 213Sept 2332 23342 2262 226% - 7 276%2 219%Dec 24d 24444 237A BTM - 7 OS 29M2 2534 2551 248, 247 Ye 270 286,May 259 2532 2 - oh 286% 2532duly 28314 260% 257 57K = HR 242Oec 264 Ne
2632 25812 245Est vol ‘cage, vol Wed 60,080; open it ais, ae
ww {ea7; 5 5,066 bu; at108m 109° 106 = Be 140 104%i 122 113 1084 tio - MWh 131% 100%Sept 119% 119 112% 193% - 24 1382 112%Dec 121% 122 118 119A — 2% 140% 118Est vol 1,607; vol Wed 1,000; open int 15,690, +99.Soybeans (cBT) 5,000 bu.; cents per bu.May 444 “447 "098 Sie + 1 Gd 488wuy 4512 454444 ae Ye 609 444
 
+Aug 451 454 44d - 1 5A 44Sept 4492 491 MI’ M7 - 1 SO ateNov 450% 455% 448 45th - M4 BOS 44602 4632 484'2 455 480 = ye 5372 455Me 412 93 ABAth ABB - S46 Abate
48612 487479 ABA s21__ 479ia 82,000; vol Wed 58.491; open int ‘art, 1,855.Soybean Meal aL (CBT) £00 tons; s per ton.
49.90 60 151,90
May 200 180.50 14950July 1a 1100 148.90 150.90 ; 4.50 190,00 148.90Aug 149.40 14970 148.10 14960 + 1.00 190.40 148.10Sept 148.00 148.50 147.10 14830 + 70 182.90 147.10Oct 147.90 148.00 148.30 147.30 + 40 181.00 148.30Dec 148.20 148.50 148,50 147.40 vw. 160,00 146.50a 148.50 149.30 147.00 Wa + 20 186.50 147.0049.50 150,00 149,00 149.60 10 186.50 149.00tv 18,500; vol Wed 28,151; open int 902,761, +492.Soybean Olt (cBn) 60 000 ths.; cents per tb.May 1820 1633 1581 1608 - 1 2068 1472wy 16.55 1669 16.15 16.43 - 12 20.95 15.1116.74 1685 16.24 1658 - 13 20.98 15.30seh 16.99 16.99 16.50 16.72 - 13 21.15 15.4817.08 17.15 16.70 1691 - 17 20.35 1568we 17239 1747 1695 1727 - tt 2.25 16.00$a02 1772 17-72 1720 1783 ~ 12 1786 16.25hey 18.03 1803 17,50 1770 - 15 1810 16.5818,00 05 17.45 17.0te vol 21,000; vol Wed 20,06; open int 124,025, - 384.eet (CBT) 5,000 bu; cents per bu,M4 ik 4 = 10 30 268i 29684 2051 in 2844 ~ 92 350 279%Sept 305 305 h 25 - 9 35 25Dec 31842 318% Fi Wn - 9 4 2Mr @ 329 Be 220-9 CSBduly 334325 z - 7 BS 30Det. a M7 338 - 8 3 StEst vol 37,000; vol Wed 27,019; “en int 135,866, +2 686.Wheat (KC) 5,000 bu.; cents per bu,Mar 3t4 7 349 HOI305%, SO Sale BOK - 9 3824 310duly 3302 340% 326% 390M - 9 350  3I7Bent MQ Mg Be MO ~ 93GB 82614BO 380 MI Ikke - Be 375 = 33hwe 389389 360 8t 9 33 383Est vol 8,418; vol Wed 7,384; open int B78, — 869.Wheat (MPLS) 5,000 bu,; cents par bu.Mar wn BM 375i 299May 35 aie 5 ba 373 19%jy Yt 43 32 BEM - «IA at 37Sept 3804 350% 341 43-8 OO RBAber a Bi 88e 4h - 6 389 MB3683622 3632 - 6 387 358i vol Pier vol Wed 5,117; open int 27,259, +278.
 
Bac=os
2251
eee
ones28388
RBeses sRe8
#e2
 
   
    
        
 
Est vol 10,308; vol Wed 7,229: open int am +233,‘Sugar-World (NyBor) 1120 000 ibs.; cents per Ib,May B79 ‘3m + AF 1068 6.10 81,574
duly fe fs ae fe tM ine ky am
Canola (WPG)-20 metric tons; Can. $ per tonMer 205.00 + 250 305.50 257.00 1,050May 282.60 284.00 280.20 28390 + 230 305.50 259.20 98,806duty 4m aang 10 rin + 120 20060 252 23,746Aug - 050 282.00 271.00 63sett 2s 3) + 0.00 288.00 268.00 1,207i 27.00 287.60 28430 287.30 t 110 209.00 271.10 © 22,434Jat? 289.50 0,90_ 280.60 277.00 457Est vol na, vol Wed 20,871; open int ma) ~4al.Wheat (WPG)-20 te tons; Can. $ per tonMat nanan, 1450) + OL | 55145.80 14560 14250 14260 ~ 3.30 159.00 4976abt 146.00 146.00 14450 14460 - 3.20 1551 503.263Oct 122.30 122.90 119.50 119.60 ~- 260 . 1,524Bec 122.60 = 260 124Est vol na; vol Wed’ 215: open int 11,052, —1Barley-Western (WPG)-20 metric tons;Mar 17 + om 117.60 QMay 129.60 12980 12810 12810 - 1.60 7,242Y 130.50 130.60 129.20 128.20 - 1.50 5,160ct 131.50 131.50 13110 13110 - 0.60 6,035Qec 133.50 133.50 133.50 13350 - 0.20 J 1,023Est vol na; vol Wed 586; open int 19,460, +76,LIVESTOCK AND MEATCattle-Feeder a") 50,000 {bs.; cents per tb,Mar 85.75 540 85.45 40° 91.30 84.60 2,904A 86.95 85.90 — 52 9060 8500 4,588lay 86.40 86.05 - S57 8990 8505 5,186Aug 87.75 87.50 - G 889 8600 4552Sept 87.35 87.48 ~ 40 88.47 86.05 80Ot 1% HS) oI He - 0 MA OHSF B0.4U 1aEst vol 1 658; vol ies i OpeCattle-Live ne (aE) ae 49,000 Ibs.; conts er Ib.Apr 7825 737 an 8182 7217 $5,007dune ee 9 73.07 a 7252 - 40 7575 8972 © 30,131Aug 723 7195 7205 = 2 75.00 6997 23,313Oct a 5 7460 7415 7417 - 37 no 7200 15,508Dec 75.52 75.55 75.20 7522 - 35 73.30 6,268Est vol 21,158; vol Wed 26.579; open int 131,996, ue ee.Hoge: ‘Lean (owe 40, 000 ibe. cents per Ib,i 65,05 8470 + 86.15 48.65 22,33070.90 70.35 + 2 ny 45 55.20 14,656oe 6700 6750 66.45 ae + O07 6750 M7? = 3992Ag 63.30 oe 6265 6300 - 10 Ry a $3.20 3.8965490 4M) $522 4 417 46.40 3.407bee 52.00 5200 5255 + 37 a 03 4460 2142Est vol 13,008, a ‘ed 9,757; open int 50573, +436,Pork Bellies CMe) we 000 tbe; cents per Ib.Ma 84.70 8725 + 300 87.25 58.00 28tMay 96.00 ee ss i 8650 + 297 86.52 60.20 2,222duly 86.40 86.85 96.05 86.85 + 300 86.85 60.10 cr)Est vol 1,285; vol Wed 777; open int 2,915, ~72.FOOD AND FIBERCocoa (NYBOT)-10 metric tons; $ per ton,Mar 1,038 1,040 1,000 988 38 1362 70? 2May { ro21 1,033 1,004 - B 122 TF 30318duly 1,030 1,036 1,018 - 4 1245 753 2N574Sept 11043 1/047 1,032 - & 1246 776 12674Dec 1,053 1,059 1,048 - 23 123? 805 | 14,910M02 1068 1,070 1,063 - 2 1257 835 B55.May - 2 1267 850 6287duly - % 1242 875 5515Seat - z 11 $7 7553135 7,604fe vol 9,125; vol Wed 5,515: open int iia 608Rates inyaCr 37,500 Ibs.; cents per tb.8030 59.50 5010 90 153.85 $9.25 96May = 61.25 6225 60.90 61.0 — 90,866duly 64.75 66.20 83.90 63.95 - 12,405Sept 67.50 67.75 86.85 9680 - 6757Dec 70.75 71.20 88.90 70.00 - 69: 4,480M02 74.25 7490 7405 7350 - 2576May = 77.00 7.00 77.00 76.35 = 186July 79.75 79.75 7975 79.20 } 332|
(continued on next page)Mechanics of Futures Markets
 
Table 2.2 (continued)
 
 
 
 
     
 
 
   
 
 
 
   
 
 
 
Oct, «B10 8.17 627 24,806 Crude ai eae Sweet Ht (NYM} 2,000 bbls.; $ rer bbl,mraz 7.90 A 690 10,108 iB 72 OM 3440 1580” 61543May = 7.76 780 2656 lay a8 28.93 Bs 2882 + 0.20 3350 15.60 104,734ay 710 i) 70 762 2970 June 2890 27.10 2853 2897 + 020 3375 14.58 49218770 7832471 duy = 28.80 27.05 2857 2701 + 0.28 3220 1905 26115Bt vol 21,050: vol Wed 20,308; open int 157,969, +2812. Aug 28.70 28.90 2854 2890 + 0.31 3160 1840 17.290Sugar-Domestic (NYBOT)-212,000 Ibs.; cents per Ib. Sept 2859 2870 2835 2874 + 0.35 3100 1795 15.444May 21 2131 2.28 24 1800 1,266 Oct = 26.25 28.42 28.25 oe + 036 3040 1960 11523duly