How do they calculate the exchange margin?

[PBS]

How do exchanges like CME calculate the margin for a particular futures contract?

Do you use that value, or a multiple of it, as a guide as to what your maximum position size should be? For instance, if the margin is $2,000, you trade up to 1 contract per $4,000 in your account ($2,000 for margin + $2,000 for risk).

 

[Ironbeam]

CME calculates the margin based on several factors, including notional value, volatility, and what they think the maximum price move can be within one trading session.

 

[Robert Morse]

Good luck understanding the math - https://www.cmegroup.com/clearing/span-methodology.html

How do exchanges like CME calculate the margin for a particular futures contract?

Do you use that value, or a multiple of it, as a guide as to what your maximum position size should be? For instance, if the margin is $2,000, you trade up to 1 contract per $4,000 in your account ($2,000 for margin + $2,000 for risk).

 

[PBS]

@Ironbeam
As a side question - can you, or any other FCM demand a margin that is higher than what the exchange says it is? When would that be the case?

 

[Ironbeam]

@Ironbeam
As a side question - can you, or any other FCM demand a margin that is higher than what the exchange says it is? When would that be the case?

Yes, we can. Typically when it involves short-selling options or when a particular market is experiencing very high volatility, or has very low liquidity.

 

[PBS]

Perhaps this is the answer to "how many contracts to trade at most?". If they have done all the job for you and come up with a number that basically says how much you can lose in a day on 1 contract then this could be a good base to the max position size in your account - taking a multiple of it, depending on risk appetite.

 

[Scataphagos]

How do exchanges like CME calculate the margin for a particular futures contract?

Do you use that value, or a multiple of it, as a guide as to what your maximum position size should be? For instance, if the margin is $2,000, you trade up to 1 contract per $4,000 in your account ($2,000 for margin + $2,000 for risk).

When you put on a futures contract, you're at risk for 100% of the notional value of said contract. Your margin and any other funds in your account are merely your initial "buffer". IOW... you can lose more than your initial margin and even more than all of the money in your account. Best to "know what you're doing" and not go too crazy with the leverage.

Oh.. and trade with stops.

 

[Ironbeam]

Perhaps this is the answer to "how many contracts to trade at most?". If they have done all the job for you and come up with a number that basically says how much you can lose in a day on 1 contract then this could be a good base to the max position size in your account - taking a multiple of it, depending on risk appetite.

In theory, yes. In reality, there have been times that the market moved more than the margin requirement.

 

[SunTrader]

Maximizing margin-allowable position size is a recipe for disaster