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Question:
Two Level I CFA candidates are discussing futures and make the following statements:
Candidate 1: Futures are traded using standardized contracts. They require margin and incur interest charges on the margin loan.
Candidate 2: If the margin balance falls below the maintenance margin amount due to a change in the contract price for the underlying assets, the investor must add funds to bring the margin back up to the initial margin requirement.
Are the candidates’ statements correct or incorrect?
A
Only one of the statements is correct.
explanation
Candidate 1 is incorrect. In the futures markets, margin is a performance guarantee. It is money deposited by both the long and the short. There is no loan involved (as opposed to in the equity markets) and thus no interest charges. Candidate 2 is correct.
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