Margin and M2M
Margin & M2M​
Margins and Mark-to-Market (M2M) are crucial concepts in futures trading, acting as safeguards to ensure smooth transactions and manage risk effectively. AlgoTest users can leverage these concepts in the Strategy Builder and Simulator to understand how trades evolve daily.
What is Margin?​
When you initiate a futures trade, you don’t pay the full contract value. Instead, a fraction called the initial margin is blocked in your trading account. This margin consists of two parts:
- SPAN Margin: The minimum margin required by the exchange.
- Exposure Margin: An additional cushion imposed by the broker to manage risk.
The margin enables traders to control a large position with limited capital, offering leverage. For example, if you trade TCS futures with a contract value of â‚ą3,00,000, the required margin may be â‚ą40,000, allowing you to control the entire â‚ą3,00,000 contract with just â‚ą40,000.
What is Mark-to-Market (M2M)?​
M2M is a daily accounting procedure where profits or losses are settled based on the day’s closing futures price. This ensures that both parties—buyer and seller—are “fair and square” at the end of each trading day. The day’s profits are credited, and losses are debited from the trader’s account.
Let’s look at a simplified example.
Example: TCS Futures Trade
- On December 1st, you buy 1 lot of TCS futures at â‚ą2,000. The lot size is 100, so your contract value is â‚ą2,00,000.
- The next day, the futures price increases to â‚ą2,050. Your profit for the day would be â‚ą5,000 (â‚ą50 gain per share x 100 shares). This amount is credited to your account through the M2M process.
Here’s a day-to-day breakdown:
| Day | Closing Price | Profit/Loss |
|---|---|---|
| Dec 1 | â‚ą2,000 | Entry |
| Dec 2 | â‚ą2,050 | +â‚ą5,000 |
| Dec 3 | â‚ą2,025 | -â‚ą2,500 |
| Dec 4 | â‚ą2,075 | +â‚ą5,000 |
Your daily profit or loss is calculated based on the previous day’s closing price, ensuring transparency and limiting counterparty risk.
Margins and AlgoTest​
On AlgoTest, you can calculate margins for your trades using our Margin Calculator. Margins allow you to take larger positions with less capital, but they also amplify risks. A small change in price can result in significant profits or losses, especially when trading with leverage.
Using AlgoTest’s Simulator, you can backtest these concepts to see how your margin and M2M work in real-world scenarios. This helps you prepare for market volatility and manage risk effectively.
Final Thoughts​
Understanding margin and M2M is essential for successful futures trading. Margins provide the leverage needed for larger trades, while M2M ensures fair settlement and reduces default risk. AlgoTest’s tools can help you apply these principles, ensuring that you navigate leveraged trades with confidence.