Commodity futures strategy
When an investor goes long - that is, enters a contract by agreeing to buy and receive delivery of the underlying at a set price - it means that he or she is trying to profit from an anticipated future price increase.
For example, let's say that, with an initial margin of $2, 000 in June, Joe the speculator buys one September contract of gold at $350 per ounce, for a total of 1, 000 ounces or $350, 000. By buying in June, Joe is going long, with the expectation that the price of gold will rise by the time the contract expires in September.
By August, the price of gold increases by $2 to $352 per ounce and Joe decides to sell the contract in order to realize a profit. The 1, 000 ounce contract would now be worth $352, 000 and the profit would be $2, 000. Given the very high leverage (remember the initial margin was $2, 000), by going long, Joe made a 100% profit!
Of course, the opposite would be true if the price of gold per ounce had fallen by $2. The speculator would have realized a 100% loss. It's also important to remember that throughout the time that Joe held the contract, the margin may have dropped below the maintenance margin level. He would, therefore, have had to respond to several margin calls, resulting in an even bigger loss or smaller profit.
A speculator who goes short - that is, enters into a futures contract by agreeing to sell and deliver the underlying at a set price - is looking to make a profit from declining price levels. By selling high now, the contract can be repurchased in the future at a lower price, thus generating a profit for the speculator.
Suppose that, with an initial margin deposit of $3, 000, Sara sold one May crude oil contract (one contract is equivalent to 1, 000 barrels) at $25 per barrel, for a total value of $25, 000.
How would the margin requirement be accounted by a commodity trading organization?
If you are a commodity trading organization trading futures and the brokerage needs a margin requirement -- how is that accounted for in the financial statements? Is it an expense in the income statement?
The amount with the futures brokers, including the margin requirement is accounted for as "other receivables", maintained in a sub account called "Amounts owning from brokers". It is a balance sheet account, under current assets.
How does a Futures Margin Account Work
It's the margin as a percentage of the overall contract value. Lower maintenance margin doesn't tell you anything - it depends on the price and number of bushels/oz or whatever you're buying. The margin on a platinum contract could be $5000, but if platinum is trading at $3000/oz, that could well be a lower margin % than $2500 on a soybean contract, etc.
But generally speaking, the lower the margin, the lower the perceived daily risk, so the opposite of your statement.