Chapter 04 · Section 4.1

Margins and Exercise

What happens, if after a price change the margin deposited with the broker/clearing member/clearing house is not sufficient for a loss arising in case of exercise?

• a) This case cannot occur because the margin initially collected must be high enough for the worst case.
  No. The margin depends on the formula used, but it is only a fraction of the total value of the underlying. If you are short a call, the potential loss (depending on how much the price rises) is unlimited.
  b) Whenever this happens the broker has to take the loss; however on average this will be covered by the margin money he receives for other customers' positions.
  c) Profit and loss on every position must be assessed at the end of every trading day by the broker/clearing member/clearing house. If necessary, additional margin money must be called in.

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