The exchange also needs the buyers and to sellers to settle their individual accounts on daily basis by paying the day-to-day margin amounts because of the daily movement of the future price.
Initial Margin is the margin amount that is to be deposited before entering into the future contract. It is decided based on the type and value of the underlying security or asset.
Maintenance Margin is the margin amount that must be maintained in a future account to hold a position. If the margin amount falls below the maintenance margin amount because of daily changes of the share prices, money has to be deposited to make the margin more than maintenance margin otherwise the position will be settled by the exchange itself.
Marking to market margin is the adjusting margin amount generated from the daily change in the settlement value of the contract compared to the previous trading day’s settlement value. The traders either have to deposit the marking to market margin amount every day or receive the marking to market margin amount every day at the end of trading based on the change in the settlement price compared to previous trading day. As it is zero sum game, one trader’s marking to market loss will be same as other trader’s marking to market gain.
Variation Margin is the margin amount that must be deposited into the account to make the margin amount same as Initial Margin Amount.
Settlement Price is the average price at the end of the day, based on which the margin amount is calculated at the end of the day.
In a future contract, the settlement can be done through either delivery of the asset or security or cash transaction.