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FRM-1 Study Notes

Mechanics of future markets

  • Specifications of a Contract
    • Asset: If asset is a commodity, exchange specifies the asset in complete detail: grade, quality, size, shape, color, etc.
    • Contract size: The amount of the asset to be delivered
    • Delivery arrangement:
      place of delivery
    • Delivery month
  • Margins
    • Margin account.: investor deposits a certain amount of money with the broker in the margin account
    • Initial margin: the initial amount deposited in the margin account
    • Maintenance margin: Is somewhat below the initial margin. The minimum amount after which a margin call is sent to the investor. After margin call investor has to top his margin account to the initial margin
  • Clearing House Margin
    • If not the broker a clearing house member has to be a member of the clearing house
    • Clearing margin : Just like a margin account with a broker, members have an account with the clearing house
    • No maintenance margin
    • Account balance to be maintained at all times = number of contracts * original margin

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