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Margin & Tradingbeginner

Variation Margin

Variation margin is the cash transferred between counterparties each day to reflect the change in the futures settlement price. For a long position with NN contracts, the daily flow is VMt=(Ft−Ft−1)×multiplier×NVM_t = (F_t - F_{t-1}) \times \text{multiplier} \times N. Losses leave the margin account, gains enter it, and the running balance funds the clearing house's daily mark-to-market mechanism. Variation margin is the operational expression of marking to market and is distinct from initial and maintenance margin, which are static buffers.

Why it matters

At the close of each trading day the exchange picks a single settlement price and revalues every open contract. The cash difference moves on a net basis through the clearing house, so the long counterparty either receives money or pays it. There is no waiting until expiry. By the time a position is closed out, every dollar of profit or loss has already changed hands through variation margin. This is why a futures contract has zero value at the end of each trading day, in contrast to a forward contract whose entire value sits unresolved until settlement.

Formulas

Daily variation margin, long position
VMt=(Ft−Ft−1)×multiplier×NVM_t = (F_t - F_{t-1}) \times \text{multiplier} \times N
Daily variation margin, short position
VMt=(Ft−1−Ft)×multiplier×NVM_t = (F_{t-1} - F_t) \times \text{multiplier} \times N
Sign flips. Total cash flow is zero across long and short, matching the zero-sum nature of futures.
Cumulative P&L to time $t$
Πt=∑i=1tVMi=(Ft−F0)×multiplier×N\Pi_t = \sum_{i=1}^{t} VM_i = (F_t - F_0) \times \text{multiplier} \times N

Worked examples

Scenario

A trader is long one ASX SPI 200 futures contract with A$25 multiplier. The settlement price moves from 7,500 to 7,520 in one day.

Solution

VM=(7,520−7,500)×25×1=VM = (7{,}520 - 7{,}500) \times 25 \times 1 = A$500 credited to the long's margin account. The short loses A$500 the same day. The clearing house executes the transfer overnight after the daily settlement price is published.

Scenario

A short position in five CME E-mini S&P 500 futures sees the settlement price rise from 5,200 to 5,225, multiplier US$50.

Solution

VM=(5,200−5,225)×50×5=−VM = (5{,}200 - 5{,}225) \times 50 \times 5 = -US$6,250. The short's margin account is debited US$6,250. If the resulting balance falls below maintenance margin, a margin call is triggered the next business morning.

Common mistakes

  • ✗Variation margin and margin call are the same thing. They are not. Variation margin is the routine daily flow for every contract. A margin call is the special action that follows when accumulated losses drag the balance below the maintenance threshold.
  • ✗Variation margin is only computed at expiry. Hull (2022) §2.5 makes the daily nature explicit. Marking to market is the defining operational feature of futures versus forwards, and it eliminates the buildup of unrealised credit risk.
  • ✗Receiving variation margin is taxable income immediately. In Australia and the US, gains and losses on commodity and financial futures held for trading are recognised on a daily mark-to-market basis under section 1256 of the Internal Revenue Code in the US, with corresponding treatment in other jurisdictions. Hedgers face different rules tied to the hedged item.

Revision bullets

  • •Daily cash flow equal to change in settlement price times multiplier times contracts
  • •Gains credited to margin account, losses debited
  • •Long flow VM=(Ft−Ft−1)×M×NVM = (F_t - F_{t-1}) \times M \times N, short flow has opposite sign
  • •Distinct from initial and maintenance margin
  • •Resets the contract value to zero at each daily close

Quick check

Variation margin represents:

Long two SPI 200 futures with multiplier A$25. Settlement moves from 7,400 down to 7,360. Variation margin is:

Connected topics

Mark-to-MktMargin Call

In learning paths

Futures Path

Sources

  1. Hull (2022), §2.5
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Standard textbook reference for the daily variation margin formula and the marking-to-market mechanism.
  2. RBA (2022), Special Topic on CCP Margin
    Reserve Bank of Australia. Special Topic on CCP Margin Arrangements. RBA, 2022.
    Authoritative regulator explanation of variation margin practice at Australian central counterparties, including the morning notification cycle.
  3. BIS-IOSCO Margin Standards
    Bank for International Settlements and IOSCO. Principles for Financial Market Infrastructures, Principle 6: Margin. BIS, 2012.
    International standard for daily and intraday variation margin in centrally cleared markets.
How to cite this page
Dr. Phil's Quant Lab. (2026). Variation Margin. Derivatives Atlas. https://phucnguyenvan.com/concept/variation-margin
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