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.
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.
Short call positions, for instance have theoretically unlimited loss potential.
In other words, the possible loss on a position might be greater than the margin money deposited.
The margin is deposited to cover the loss potential of a one-day price movement.
Daily valuation of positions is therefore necessary - just like banks monitor their credits.