Hello: I am having a little bit of trouble with the intuition on maintenance margins. Why, for instance when the maintenance margin is 20% and the initial margin is 40% does a margin call occur at a rate higher than the initial margin? (I know the formulas, just not the derivation) Thanks!
what do you mean by higher rate? I assume you are talking about leverage but it’d be great if you could clarify your question.
With a margin call, if your cash position falls below the value (as a % of the asset) that is required by the maintenance it will be called.
-the initial margin is the equity required to buy/sell the security -maintenance margin is the minimum equity required while holding the security. -thus, the m. margin is lower because it provides some necessary slack when holding a security. -If i. margin = m. margin, each basis point drop would require a margin call -that is just inefficient, costly, and unnecessary*.