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maintenance margin. At this point or some point before, you
will receive a notice from your broker known as a margin (or
maintenance) call, in which case you must either deposit more
cash ($800 in our example) into your account to meet the
$5,000 margin requirement or settle some of your contracts to
stay within a lower margin requirement. Your broker may (and
usually will) opt to settle all or part of your contracts if you
don't make the required deposit. If you or your broker fully
offset your position, then your losses will be $2,000 (plus
commissions). Given your original investment of $6,200 you
have a leeway of $6.20/oz. loss on your contracts to consume
your entire investment.Of course your broker will require more
cash deposits from you long before you reach this position.
Otherwise he will have no assurance that you will not skip town
if your contracts continue to lose money. That is why your
broker may offset your positions if you don't meet your margin
requirements. (As you agent, your broker will be ultimately
responsible to make good or settle the contracts.)
The same margin rules also apply to selling contracts. For example,
when you sell ten gold contracts at $310/oz., don't expect to receive
$310,000 in your account (unless you actually own that much gold and
it is registered with the clearing house for this purpose). You would
once again require an initial margin in your account and your account
must stay within the required maintenance margin to insure against
potential losses if gold prices rise. And yes, you will receive the dreaded
margin call from your broker if those contract prices rise beyond a
certain point.
As you can see from the above example, margin gives you leverage,
translating to large profits or losses given small price movements in the
underlying commodities. You will never be able to realize such high …
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