Variation Margin

Futures positions are revalued against the exchange's official settlement price at the close of each trading session. The change in that settlement price, multiplied by the contract multiplier and the number of contracts, produces a gain or loss that is realised immediately rather than accrued to expiry. The clearinghouse debits the accounts of losing counterparties and credits the accounts of winning ones, so the aggregate transfer nets to zero across the system.

This daily resetting is why a futures contract's value returns to zero after each settlement: the accumulated profit or loss has already moved in cash. It also transforms one large credit exposure at maturity into a series of small, single-day exposures, which is the central reason clearinghouses can guarantee performance on contracts between counterparties who never assess each other's creditworthiness.

Begin with initial margin deposited per contract. At each settlement, add the day's gain or subtract the day's loss to obtain the new account balance. Compare that balance with the maintenance margin requirement, which is set below the initial level. If the balance is at or above maintenance, nothing happens and any excess above initial margin may be withdrawn. If the balance falls below maintenance, the trader must deposit the amount needed to bring equity all the way back to the initial margin requirement, not merely back over the maintenance threshold.

A long position loses when the settlement price falls; a short position loses when it rises. Candidates should be able to run this sequence across several days, identify precisely which day triggers the call, and state the size of the required deposit.

On exchanges, variation margin flows through the clearinghouse in cash, usually once daily and intraday during volatile sessions. In the over-the-counter market, the equivalent mechanism is the collateral exchange governed by a credit support annex, under which the out-of-the-money party posts collateral against the swap's current mark-to-market value. Post-crisis reform pushed standardised swaps into central clearing, where they follow essentially the same daily settlement discipline as futures, and imposed initial and variation margin requirements on many uncleared trades.

The practical contrast is with a forward contract, where no interim cash moves and the full exposure accumulates until settlement. That difference in timing of cash flows drives the credit-risk distinction between forwards and futures, and also explains why futures and forward prices diverge when interest rates correlate with the underlying.

Expect to be asked for the account balance after a given sequence of settlement prices, the day on which a call is issued, and the deposit required. Precision on directions matters: gains are credited automatically, losses are debited automatically, and only a breach of the maintenance level creates an obligation to top up.

Beyond the arithmetic, the concept underpins liquidity risk. A hedger whose futures leg is deeply out of the money must fund real cash outflows today even though the offsetting gain on the physical or forward exposure is unrealised. Failure to meet a call allows the broker or clearinghouse to close the position immediately, converting a paper loss into a realised one at an unfavourable moment. Understanding that funding asymmetry is as important as computing the balance.