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FRM Exam Part I · Futures Markets

Margin, Marking to Market and Daily Settlement in Futures

Updated 11 October 2026 · Fact-checked

Margin is collateral posted to cover futures losses. Each day the exchange marks your position to the settlement price and moves the gain or loss through your margin account. If the balance falls below maintenance margin, you get a margin call and must restore the account to initial margin.

Understand Margin, Marking to Market and Daily Settlement

A futures contract has no upfront price. Instead, both sides post initial margin, a good-faith deposit held in a margin account. It protects the clearinghouse if a party defaults.

Every day the contract is marked to market. The clearinghouse compares today's settlement price with yesterday's. A long gains if the price rose and loses if it fell. A short is the reverse. This daily gain or loss is variation margin, and it is paid in cash that day. This is daily settlement.

The account balance moves with these flows. If it drops below the maintenance margin, the broker issues a margin call. You must deposit enough to bring the balance back up to the initial margin level, not just to the maintenance level. If you fail, the broker closes your position.

If the balance is above initial margin, you can withdraw the excess. Interest on margin is often earned if posted in cash or securities such as T-bills, so the cost of margin can be small.

Daily settlement means a futures contract is effectively closed out and rewritten at a new price every day. The total gain or loss over the life equals the final price minus the original price, but it arrives in daily pieces. That is a key cash flow difference from a forward, which settles only at maturity.

Key formulas to remember

Daily variation margin (long)
Variation margin = (Settlement price today − Settlement price yesterday) × Contract size × Number of contracts
Positive means cash credited to a long. A short receives the negative of this amount.
Daily variation margin (short)
Variation margin = (Settlement price yesterday − Settlement price today) × Contract size × Number of contracts
Short gains when prices fall.
Margin account balance
New balance = Old balance + Variation margin + Deposits − Withdrawals
Check against maintenance margin each day.
Margin call amount
Call = Initial margin level − Current balance (if balance < maintenance margin)
You restore to initial margin, not to maintenance. Scale both levels by the number of contracts.
Price at which a margin call occurs (long)
Price drop that triggers call = (Balance − Maintenance margin) ÷ Contract size, per contract
For a short, the trigger is a price rise of the same size.
Total gain over life
Sum of daily settlements = (Final price − Original futures price) × Contract size (long)
Ignores interest earned on the daily flows.

How to solve Margin, Marking to Market and Daily Settlement questions

Use a day-by-day table of the margin account. It works for margin calls, withdrawals and cumulative cash flows.

  1. 1Identify your position (long or short), the contract size and the number of contracts.
  2. 2Write the initial margin and maintenance margin for the whole position (per-contract level × number of contracts).
  3. 3Compute each day's price change using settlement prices. The first day's change is measured from the entry price.
  4. 4Multiply by contract size and contracts. Give it a plus sign if it helps your position and a minus sign if it hurts.
  5. 5Update the balance: previous balance + variation margin + deposits − withdrawals.
  6. 6Compare the balance with maintenance margin. If below, the margin call equals initial margin minus balance.
  7. 7Add the call to the balance, then carry the new balance to the next day.
  8. 8State the answer asked for: call amount, balance, day of the call or total gain.

Quickest way: Trigger-price shortcut

When to use it: When the question asks when or at what price a margin call occurs, or how much you can withdraw.

  1. Compute the cushion: balance − maintenance margin, for the whole position.
  2. Divide the cushion by contract size × number of contracts to get the adverse price move.
  3. Subtract this move from the entry price for a long, or add it for a short, to get the trigger price.
  4. For the call amount, take initial margin − balance, where the balance equals maintenance margin at the trigger.
  5. Check the answer against the options: the call is normally larger than the gap to maintenance.

Common mistakes in Margin, Marking to Market and Daily Settlement

  • Restoring the account only to the maintenance margin.

    The call is triggered by maintenance, so students assume it is the target.

    Fix: The call brings the balance back to initial margin. Call = initial margin − current balance.

  • Using the wrong sign for a short position.

    Students apply the long formula by habit.

    Fix: For a short, a price rise is a loss. Reverse the sign before updating the balance.

  • Forgetting contract size or number of contracts.

    Questions quote per-unit prices and per-contract margins.

    Fix: Write the total position margin and total multiplier first, then calculate.

  • Treating variation margin as a one-off deposit.

    It sounds like another type of initial deposit.

    Fix: Variation margin is the daily gain or loss paid through the account. Initial margin is the starting deposit.

  • Measuring the first day's change from the wrong price.

    Students compare day 1 with day 0 settlement rather than the entry price.

    Fix: On the day of trade, use the entry price as the reference, then use prior settlement afterwards.

  • Saying a margin call is triggered whenever the balance falls below initial margin.

    Confusing the two levels.

    Fix: Balances between maintenance and initial margin do not trigger a call. Only a fall below maintenance does.

Worked examples

Example 1

A trader buys 10 futures contracts at 2,000. Each contract is for 50 units. Initial margin is $5,000 per contract and maintenance margin is $4,000 per contract. Day 1 settlement is 1,980. Day 2 settlement is 1,960. Find the margin call, if any, at the end of day 2. Assume no withdrawals.

Show the solution
  1. Position totals: initial margin = 10 × 5,000 = $50,000. Maintenance margin = 10 × 4,000 = $40,000.
  2. Day 1 change = 1,980 − 2,000 = −20. Variation margin = −20 × 50 × 10 = −$10,000. Balance = 50,000 − 10,000 = $40,000.
  3. Balance equals maintenance margin, not below it, so there is no call.
  4. Day 2 change = 1,960 − 1,980 = −20. Variation margin = −$10,000. Balance = 40,000 − 10,000 = $30,000.
  5. $30,000 is below $40,000, so a call is made.
  6. Call = 50,000 − 30,000 = $20,000.

Answer: The margin call at the end of day 2 is $20,000.

Example 2

A trader sells 5 futures contracts at 800. Each contract covers 1,000 units. Initial margin is $4,000 per contract and maintenance margin is $3,000 per contract. The account holds exactly the initial margin. At what futures price does a margin call first occur?

Show the solution
  1. Total initial margin = 5 × 4,000 = $20,000. Total maintenance margin = 5 × 3,000 = $15,000.
  2. Cushion before a call = 20,000 − 15,000 = $5,000.
  3. Total multiplier = 1,000 × 5 = 5,000 units.
  4. Adverse price move = 5,000 ÷ 5,000 = 1.00.
  5. A short loses when the price rises, so the trigger is 800 + 1.00 = 801.
  6. At 801 the balance equals maintenance margin, so the call occurs when the price rises above 801.

Answer: A margin call occurs when the futures price rises above 801.

Exam tips

  • Always compute totals for the whole position first. Many wrong options come from using per-contract margin.
  • Memorize that a call restores the account to initial margin. Options often include the gap to maintenance as a trap.
  • Check whether the balance is below maintenance, not merely below initial margin.
  • Expect conceptual questions as well: daily settlement reduces credit risk and distinguishes futures cash flows from forwards.
  • Use a quick table on scratch paper with columns for price, change, variation margin and balance.

Practice questions from Futures Markets

Margin, Marking to Market and Daily Settlement in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Margin, Marking to Market and Daily Settlement: frequently asked questions

What is the difference between initial, maintenance and variation margin?

Initial margin is the deposit required when you open the position. Maintenance margin is the minimum balance you must keep. Variation margin is the daily gain or loss credited or debited to your account through marking to market.

How do I calculate a margin call in futures?

Update the account balance for the day's variation margin. If it is below maintenance margin, the call equals the initial margin level minus the current balance. Use whole-position amounts.

Do I get a margin call if my balance is between maintenance and initial margin?

No. A call is triggered only when the balance drops below maintenance margin. Between the two levels you simply hold less than the initial margin without being required to top up.

How does daily settlement differ from a forward contract?

A futures contract settles gains and losses in cash every day. A forward normally settles once at maturity. This reduces the build-up of credit exposure in futures.