Calculating Daily Returns for Futures Contract

Question

I am calculating daily returns for a position in a futures contract. I am a little stuck with margin and how to account for it. I specifically dont understand how return is calculated after Margin account falls below Maintenance Margin. I will ask my issue through an example , please help if you can

Lets say we have a position in the Nifty Index Future(the underlying is Nifty Index, Lot Size is 50, and lets say InitialMargin is 10% and Maintenance Margin is 85% and any extra money is kept in the MarginAccount and not removed). Ignore any transaction cost

Bought the IndexFuture at the price 6000, so Initial Margin is (6000*50*10/100) 30,000 and Maintenance Margin is 25,500.

Starting Futures Value(6000*50)=300,000; MarginAccount = 30,000
At end of Day 1, price of futures contract is 5900. So
New Futures Value(5900*50)=295,000
PnL =-5000
Return (PnL/Margin=-5000/30,000) =-16.67%
Margin Account (30,000 + -5000) = 25,000

Starting Futures Value(5900*50)=295,000; MarginAccount = 25,000
At the end of Day 2, price is 5800
New Futures Value(5800*50)=290,000
PnL =-5000
Return (PnL/Margin=-5000/25000) =-20%
Margin Account (25,000 + -5000) = 20,000

This is below the Maintenance Margin, so before the end of this day we add money(10,000) to make the Margin Account back to 30,000 (the initial margin)

Now, how do I calculate returns for day 3, should I use 30,000 (The Margin account value) or should I use 40,000 (which will be capital invested i.e. 30,000 + 10,000)

Please let me know what you guys think Thanks

Answer 1

To calculate any daily return, all one need do is divide the final value by the initial value, subtract 1, and multiply by 100%:

( (v_f / v_i ) - 1 ) * 100%

This can be applied to either the futures alone, the investments used as margin collateral alone, or all together.

Margin collateral as a factor of a derivative's return

Collateral can take many forms.

Many suggest that cost and revenue for a derivative trade should also take into account margin requirements. This can become problematic.

If a futures position moved against the trader, yet the margin was secured with equities at the maximum, and the equities moved with the trader, the futures trade could be interpreted as less of a loss because the collateral, which is probably totally disassociated with the futures position, increased in value.

Then again, if a futures position moved with the trader, yet the margin collateral moved against the trader then taken together, the futures trade would look less profitable.

Furthermore, most likely the result of a futures position and its collateral would never produce the same result, so extrapolation would become ever more difficult.

For ease of analysis, a position's cost and revenue should be segmented from another unless if those positions are meant to hedge each other. Margin is not a cost, but it is a liability, so margin will affect the balance sheet of a futures trade but not its income statement, again unless if the collateral is also used to hedge such futures position.