Margin

In a margined market, profit and loss are calculated on the whole value of the contract while a percentage of that value is set aside as collateral. An adverse move is therefore measured against the whole contract rather than against the collateral, so a loss can exhaust the margin posted and is not limited to the amount deposited. A favourable move is measured on exactly the same basis and to exactly the same degree. Margin is the name for the money held, and it is neither a fee nor a purchase price: it is ring fenced while the contract is open and released when it closes.

The amount is the contract's full value multiplied by the margin requirement percent that the counterparty sets for the instrument, subject in regulated markets to a floor imposed by the regulator. Once posted it shows on the account as used margin, and what is left over shows as free margin, the part still available to support a further position or to absorb an adverse move on the ones already open.

The most common misreading is that margin is the amount at stake. It is not a maximum loss, a deposit against a known cost, or a price paid for the contract. It is a performance bond, and the arithmetic that consumes it runs on the contract, not on it. The second misreading is that the figure is static. Requirements are set per instrument and can be changed by the counterparty, including while a position is open, so the collateral a position needs today is not necessarily what it needed when it was opened.