Margins In Currency Markets ?

Trading in the currency markets requires a trader to think in a slightly different way also about margin. Margin on the forex is not a down payment on a future purchase of equity but a deposit to the trader's account that will cover against any currency-trading losses in the future. A typical currency trading system will allow for a very high degree of leverage in its margin requirements, up to 100:1. The system will automatically calculate the funds necessary for current positions and will check for margin availability before executing any trade.

Margins & Voilations ?

Margins are calculated on VAR ( Value at Risk ) basis.
The amount will be large to enough to cover a one – day loss that can be encountered on 99% of days, depending on the volatility of the stock or Index. Initially SEBI has stipulated 5% minimum margins. Stock Exchanges can impose higher margins. Trading members can also impose higher margins on clients. The margin will depend on the risk profile of the client and
delay in funds transfer in banks.

Maintenance Margin is typically 75% of Initial Margin.

When margin falls below Maintenance margin. Margin call is made to restore it to Initial Margin.
Margins to be imposed on clients will depend on

• Price Volatility
• Daily Circuits, if any
• Time needed to recover additional margins
• Traders objectives
• 1. Day Trading – Less margin
  2. Calendar Trading – Less margin

If margins are not received in reasonable period, contract can be closed out.

VIOLATIONS

• Initial Margin violation
• Mark to Market value violation
• Contract position Limit violation

Initial Margin violation
Liquid Net worth of trading member = Deposits with NSE – initial margin at any point of time.
Liquid net worth of Rs 50 lakhs always to be kept with exchange. Say total deposits are 80 lakhs, till such time that initial margins are upto 30 lakhs, there is no problem. But if the exposure increases and initial margin goes to 31 lakhs, it is a violation.

Mark to Market value violation
The mark to Market value of CM, across contracts, is monitored intra-day. At no point of time should the mark to market value of all open positions of a clearing member be greater than liquid net worth 33 1/3 time mark to market value.
Contract position Limit violation
Limit on trading members open position. Higher of Rs 100 crores or 15% of open interest in the nearest month. Any crossing, even on intra-day basis shall be a violation.

Margins In Option Trading ?

For Option Buyer

Option buyer does not carry any risk beyond the premium. He is paying this premium upfront at the time of the transaction. So there is no need for any further margin. He does not have to pay any margin, in addition to the premium paid.

For Option Seller
Option seller or writer carries unlimited risk. So there are margins on his positions. In addition to initial margin, there will be mark to mark margin.

Leverage & Margin

Leverage & Margin
Leverage trading, or trading on margin, means you aren't required to put up the full value of the position. Forex trading offers more leverage than stocks or futures - up to 200 times the value of your account. Of course keep in mind that increased leverage also increases your risk. There are no margin calls in forex trading, so if your account falls below required levels, for your protection we will close out all positions automatically. You'll never lose more money than you have in your account.
More leverage means more opportunity - and more risk It's crucial to remember: increasing leverage increases risk. To limit downside risk, monitor your account regularly and use stop-loss orders on every open position.