As companion series of Blockchain 101, Contract Trading 101 is the beginners guide to understand contract trading-- a practical tool for hedge, arbitrage and speculation.
In digital asset contract trading, users don’t have to pay the full amount of the contract notional value, instead they are only required to deposit a certain proportion as the margin. This is so called the margin mechanism.
The terminology for this “certain proportion” is the Initial Margin. Digital asset contract trading utilizes a dynamic margin mechanism.
When a user holds a position in a certain contract, the margin ratio will change as the contract price changes.
When the margin ratio is too low, the user needs to deposit more digital asset to increase the margin in time, in order to avoid his/her position being liquidated.
Different leverage multiples correspond to different initial margin requirements.
Taking the Huobi contract trading platform as an example, users can choose different amount of leverage, such as 1 x, 5 x, 10 x and 20 x, and the corresponding initial margin requirements are 100%, 20%, 10% and 5%, respectively.
Once users deposit the initial margin, they can start trading contracts with notional values up to 20 times of the initial margin.
Therefore, the margin mechanism is able to increase the capital efficiency to some extent.