CHAPTER 3

Pricing and Futures Analysis

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 Margining and Marking-to-Market
Margin Requirement Marking-to-Market
Is a legal requirement for buyer and seller to The marking-to-market process can be
pay a portion (margin) of contract value (5% - thought of as the process by which the
10%), which represent the commitment of clearinghouse recognizes gains/losses incurred
both contracting parties in the futures trading by the long and short positions and adjusts
their margin accounts accordingly.
- Daily mark-to-market
- Daily positioning

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 Type of Margins
1. Initial margin 2. Maintenance Margin
The obligation of buyer and seller to pay Minimum amount to be maintained and
a portion (%) in order to initiate his normally below the value of initial margin.
trading.
Usually 10% of the contract value Usually 70% of the initial margin
This margin will be returned when he
close-out his contract.

3. Variation/Variable Margin 4. Call Margin

Indicate the initial margin vary according If the margin fallen below the maintenance
to the closing prices. margin, the investor requires to top up
such shortage up to initial margin.
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Example 1
Day Position Settlement Price Variation Margin (VM)
per mT change Profit (loss) Balance Notes
RM RM RM RM
Mon 12-Oct Sell 2 Dec FCPO @ RM2500 12,500 IM = 10% x CV = 12,500
13-Oct 2505 -5 -250 12,250 CV = P x #ctr x ctr size = RM125,000
14-Oct 2507 -2 -100 12,150 MM = 70% x IM = RM8,750
15-Oct 2509 -2 -100 12,050
16-Oct 2506 +3 +150 12,200
Mon 19-Oct 2500 +6 +300 12,500
20-Oct 2490 +10 +500 13,000
21-Oct 2475 +15 +750 13,750
22-Oct 2450 +25 +1250 15,000
Close-out contract, profit
Buy 2 Dec FCPO @
23-Oct 2423 +27 +1350 16,350 = (2500-2423) x 2 x 25
RM2423
= RM3850
Cash withdrawal = 12,500 + 3850
= RM16,350
77 3850 3,850

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Example 2
Day Position Settlement Price Variation Margin (VM)
per mT change Profit (loss) Balance Notes
RM RM RM RM
Mon 12-Oct Buy 2 Dec FCPO @ RM2500 12,500 IM = 10% x CV = 12,500
13-Oct 2505 +5 +250 12,750 CV = P x #ctr x ctr size = RM125,000
14-Oct 2507 +2 +100 12,850 MM = 70% x IM = RM8,750
15-Oct 2509 +2 +100 12,950
16-Oct 2506 -3 -150 12,800
Mon 19-Oct 2500 -6 -300 12,500
20-Oct 2490 -10 -500 12,000
21-Oct 2475 -15 -750 11,250
22-Oct 2450 -25 -1250 10,000
VM < MM, required CM on the same day or
before 10.30am on the following business day.
23-Oct 2423 -27 -1350 8,650
OR force to closed-out

Mon 26-Oct 12,500 Call Margin = 12,500 - 8650 = RM3850

Sell 2 Dec FCPO @ RM2423 Close-out contract, loss = (2423-2500) x 2 x 25

= RM3850
Cash withdrawal = 12,500 - 3850 = RM8600

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 Futures Price and Cash Price
Terminology Condition
Basis * Future Price – Cash Price
The difference between futures price (contract) and cash price
(spot price) of the underlying instrument (physical).

Contango * Future price > cash price

Future price normally traded above the cash price or “premium”
or positive
Backwardation * Future price < cash price
Future price traded below the cash price or “discount” or
negative
Convergence * Futures price
The cash and futures price moves in the same direction though = cash price at maturity
by not with the same amount.

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Diagram 1
Contango, F > S Backwardation, F < S Convergence, F = S

P F
S
P P
F S

S F

0 T 0 T 0 T
F=S

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 Volume and Open Interest/Position

Volume Open Interest/Position

• Referred to the number of contracts traded for a • Refers to the number of outstanding contracts for
given contract month a given contract month (or yet to be closed-out
or expire)
OR
OR
• Total of purchases OR total of sales during the
trading session • Total number of futures contracts at the end of
previous day’s trading session still remain “open”
(not yet closed out by an offsetting futures trade
or by delivery)

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Example 3
Nov FKLI Dec FKLI
Day Trading Vol OI Vol OI
1 Buy 3 Nov FKLCI 3 3
2 Sell 3 Dec FKLI 3 3
3 Buy 1 Dec FKLI 1 2
4 Buy 3 Nov FKLCI 3 6
5 Sell 2 Nov FKLCI 2 4
6 Buy 2 Dec FKLI 2 0
7 Sell 3 Nov FKLCI 3 1
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10
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Clearing House

buy from Intermediary sell to

Long CH Short
Record
sell to management buy from

“Novation Principle”
Substitute itself as Seller to Buyer and Buyer to Seller
- enhance liquidity
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- easy entry and exit
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