Finc derivatives margin accounts

Q: What is a margin account?

A: Account holding funds to cover potential losses and avoid credit risk in futures trading.

Q: What is the initial margin?

A: Money deposited when entering a futures contract.

Q: What is marking to market?

A: Daily adjustment of the margin account to reflect gains or losses.

Q: What is the maintenance margin?

A: Minimum balance the margin account must maintain.

Q: What triggers a margin call?

A: Balance falls below maintenance margin; trader must top up to initial margin.

Q: What is the role of a central counterparty (CCP)?

A: Removes credit risk in OTC forwards by acting like a clearing house.

Q: What is short selling?

A: Selling an asset you do not own by borrowing it first, then buying back later to return it.

Q: What steps are involved in short selling?

A: Borrow → Sell → Buy back → Return.

Q: What obligations does a short seller have?

A: Pay any income (dividends or coupons) during the borrowing period.

Q: Is a margin account needed for short selling?

A: Yes — funds must be kept with the broker arranging the short sale.