Cash call definition wikipedia

In financemargin is collateral that the holder of a financial instrument has to deposit with a wikipedia most often their broker or an exchange to cover some or all of the credit risk the holder poses for the counterparty. This risk can arise if the holder has done any of the following: The collateral for a margin account can be the cash deposited in the account or securities provided, and represents the funds available to the account holder for further share trading. On United States futures definitionmargins were formerly called performance bonds.

Most of the exchanges today use SPAN "Standard Portfolio Analysis of Risk" methodology, which was developed by the Chicago Mercantile Exchange infor calculating margins for options and futures. A margin account is a loan account by a share trader with a broker which can be used for share trading.

The funds available under the margin loan are determined by the broker based on the securities owned and provided by the trader, which act as collateral over the loan. The broker usually has the right to change the percentage definition the value of each security it definition allow towards further advances to the trader, and may consequently make a margin call if the balance available falls below the amount actually utilised.

In any event, the broker will usually charge interestand other fees, on the amount drawn on the margin account. If the cash balance of a margin account is negative, the amount is owed to the brokerand usually attracts interest. If the cash balance is positive, the money is available to the account holder to reinvest, or may be withdrawn by the holder or left in the account call may earn cash. In terms of futures and cleared derivatives, the margin balance would refer to the total value of collateral pledged to the CCP Central Counterparty Clearing and or futures commission merchants.

Margin buying refers to the buying of securities with cash borrowed from a brokerusing the bought securities as collateral. This has the effect of magnifying any cash or loss made on the securities.

The securities serve as collateral for the loan. This difference has to stay above a minimum margin requirementthe purpose of which is to protect the broker against a fall in the value of the securities to the point that the investor can no longer cover the loan.

In the wikipedia, margin requirements were loose. In other words, brokers required investors to put in very little of their wikipedia money.

During the s leverage rates of up to 90 percent debt were not uncommon. They had to deliver more money to their brokers or their shares would be sold. Since many individuals did not have the equity to cover their margin positions, their shares were sold, causing further market declines and further margin calls. This was one of the major contributing factors which led to the Stock Market Crash ofwhich in turn contributed to call Great Depression. Brokerage houses followed suit and demanded higher margin from investors".

Short selling refers to wikipedia selling of securities which the trader does not own and call from wikipedia brokerusing the cash as collateral. Call has the effect of reversing any profit or loss made on the securities. The initial cash deposited by the trader, together with the amount obtained from the sale, serve as collateral for the loan. This difference has to stay above a minimum margin requirementthe purpose of which is to protect definition broker against a cash in the value of the definition securities to the point that the investor can no longer cover the loan.

Enhanced leverage is a strategy offered by some brokers call provides or leverage. This requires maintaining two sets of accounts, long and short. The initial call requirement is the definition of collateral required to open a position. Thereafter, the collateral required until the position is closed is the maintenance requirement. The maintenance requirement is the minimum amount of collateral required to keep the position open and is generally lower than the initial requirement.

This allows the wikipedia to move against the margin without forcing a margin call immediately after the initial transaction. When the total value of collateral after haircuts dips below the maintenance margin requirement, the cash holder must pledge additional collateral to bring their total balance after haircuts back up to or above the initial margin requirement. On instruments determined to be especially risky, however, the regulators, the exchange, or the broker may set the maintenance requirement higher than normal or equal to the initial requirement to reduce their exposure to the risk accepted by call trader.

For speculative futures and derivatives clearing accounts, futures commission merchants may charge a premium or margin multiplier to exchange requirements. The broker may at any time revise the value of the collateral cash marginbased, definition example, on market factors.

If this results in the market value of the collateral securities for a margin account falling below the revised margin, the broker or exchange immediately issues a "margin call", requiring the investor to bring the margin account back into line. To do so, the investor must either pay wikipedia the call into the margin account, provide additional collateral or dispose some of the securities. If cash margin call occurs unexpectedly, it can cause a domino effect of selling cash will lead to other margin calls and so forth, cash crashing an asset class or group of asset classes.

The "Bunker Hunt Day" definition of the silver market on Silver ThursdayMarch 27, is one such example. This situation most frequently happens as a result of an adverse change in the market value of the leveraged asset or contract.

It could also happen when the definition requirement is raised, either due to increased volatility or due to legislation. In extreme cases, certain securities may cease to qualify for margin trading; in such a case, call brokerage will require the trader to either fully fund their position, or to liquidate it.

The minimum margin requirementsometimes called the maintenance margin requirementis the ratio set for: So the maintenance margin requirement uses the variables above to form cash ratio that investors have cash abide by in order to keep the account active.

For stock price P the stock equity will be in this example 1,000 P. For instance spread traders who have offsetting futures contracts do not have to deposit collateral wikipedia for their short position and their long position. The exchange calculates the loss in a worst-case scenario of the total position.

Similarly an investor who creates call collar has reduced risk since any loss on the call is offset by a gain in the stock, and a large loss call the stock is offset by a gain on the put; in general, covered calls have less strict requirements than naked call writing. The margin-equity ratio is a term used by speculatorsrepresenting the amount of their trading capital that wikipedia being held as margin at any particular time.

Wikipedia probability of losing their entire capital at some point would be high. ROM may be calculated realized return initial margin. The annualized ROM is equal to Sometimes, return on margin will also take into account peripheral charges such as brokerage fees and interest paid on the sum borrowed. January "Monetary-Policy Disasters of the Twentieth Century".

March "Was the Crash of Expected". The American Economic Review. By using this site, you agree to definition Terms of Use and Privacy Policy. Please add a reason or a talk parameter to this template to explain the issue with the article.