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when a currency futures contract is bought and sold the buyer or seller is required to deposit a sum of money with the exchange called initial margin.if losses are incurred as exchange rates and hence the prices of currency futures contracts changes the buyer or seller may be called on to deposit additional funds with the exchange equally profits are credited to the margin account on a daily basis as the contract is “marked to market” plz explain this paragraph easily so i can understand
With futures, we only settle up any profits or losses at the end of the deal (we do not actually pay out cash to buy futures at the start, or receive cash if we sell futures at the start).
Because of this the dealer will want a deposit at the beginning (the margin). At the end of the deal you get back your deposit plus and profit on the futures, or less any loss on the futures. (The deposit makes sure that if there is a loss on the future you cannot just run away and ignore it 🙂 ).
During the deal the price of the futures will fluctuate. If the dealer sees that your are currently losing money on the future then he will required you to increase your deposit.
That is what the paragraph means, but it is actually far more than you can be expected to write for Paper F9. (If futures are asked in F9 then it will be wanting you to explain briefly how futures work, rather than go into detail about the margin. Apart from the fact that you would be losing interest on the deposit, it is rather irrelevant because you get it back at the end of the deal.)
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