CFD Market Fundamentals: Margins

Submitted by Stock Market News on 23 May, 2011 - 13:12

What is a variation margin?

When trading CFD in ASX, initial margins are required to open contracts. Apart from that, any movements in price is covered by further payments, which are called variation margins.

If you have a long position and the price drops below the position's entry price or the previous day's closing price if it was help overnight, then a trader is required to pay the variation margin. The payment should be large enough to over the adverse movement of position's value in the market.

On the other hand, when you are in a short position and the price drops, the trader will receive a variation margin equal to the positive movement of the position's value in the market.

If the trader fails to pay the variation margin, the position will be closed. The trader has to pay for the shortfall in funds if the initial and variation margins are not enough to cover it. This is done to ensure that the Clearing House will have sufficient collateral to support buyers and sellers.

For example: The variation margin is based on the market to market revaluation of a CFD position in ASX at the end of the day. When the trading closes, all positions are revalued against the DSP (Daily Settlement Price). The DSP becomes the basis in calculating variation margins and the closing price of the CFD's underlying asset. With this, the ASX CFD and the underlying asset close equally.

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