In a futures contract, ‘initial margin’ is cash that must be deposited with the futures exchange when a contract is entered into.

Question

BlackTom AI · Accepted Answer

Initial margin is a performance bond — a good-faith deposit required to enter a futures position. It is posted at the start of the contract to guarantee you can meet potential losses from daily price movements.

Relevant knowledge points:
- Initial margin is set by the exchange/clearinghouse (and collected via your broker) and is required when a futures contract is opened.
- It is not a purchase price or premium; it is collateral to cover future losses.
- Futures positions are marked-to-market daily; if losses reduce your equity below the maintenance margin, you receive a margin call to top up the account (variation margin).
- Acceptable forms are typically cash or other approved collateral, though cash is the most common.

Step-by-step reasoning:
1. When you enter a futures contract, both long and short parties must post initial margin to the clearinghouse (practically via their broker). This is required immediately at contract initiation.
2. The initial margin amount is determined by the exchange and reflects potential volatility and credit risk; it is typically a fraction of the contract’s notional value.
3. Each trading day the contract is marked-to-market. Gains are credited and losses debited from the margin account. If losses cause the account to fall below maintenance margin, a margin call requires replenishment.
4. Because the deposit is required at the time the contract is entered, the statement that initial margin is cash that must be deposited when a contract is entered into is correct in substance.

Why the correct answer is True:
- The initial margin’s defining feature is the required deposit at contract initiation to secure performance. That matches the statement.

Why False is incorrect:
- Saying False would contradict the fundamental purpose and timing of the initial margin requirement. While some collateral forms other than cash may be accepted in practice, the essence — a required deposit at entry — remains true.

Conclusion: The correct answer is True, which matches the provided answer.

In a futures contract, ‘initial margin’ is cash that must be deposited with the futures exchange when a contract is entered into.True/False

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