False Statements About Margin

A

Margin must be posted before the trade.

The correct answer is D. The statement "The initial margin on a contract approximately equals the maximum daily price fluctuation of the contract" is false.

Margin refers to the amount of money or collateral that an investor must deposit in a margin account when entering into a margin transaction, such as buying securities on margin. Margin allows investors to borrow funds from a broker to finance their investment activities. It involves borrowing money to buy securities and using the purchased securities as collateral.

Let's go through each statement and explain why D is false:

A. The initial margin must be posted within three days of the trade. This statement is true. When engaging in a margin transaction, the initial margin, which is a percentage of the total transaction value, must be deposited into the margin account within a specified time frame. Typically, this timeframe is three days from the trade date.

B. Each trader's margin account is marked-to-market at the end of every day to reflect any gains and losses they have experienced for that day. This statement is true. At the end of each trading day, the trader's margin account is adjusted to reflect the current market value of the securities held in the account. This process is known as marking-to-market. If the securities have increased in value, the account value will increase, and if they have decreased in value, the account value will decrease.

C. If the margin account balance falls below the maintenance margin level, the trader must bring it back up to the initial margin level. This statement is true. When engaging in margin trading, there are two important margin levels to consider: the initial margin level and the maintenance margin level. The initial margin is the minimum amount that must be deposited initially, while the maintenance margin is the minimum amount that must be maintained in the account. If the account balance falls below the maintenance margin level, the trader is required to add funds or securities to bring the balance back up to the initial margin level.

D. The initial margin on a contract approximately equals the maximum daily price fluctuation of the contract. This statement is false. The initial margin is not directly related to the maximum daily price fluctuation of a contract. The maximum daily price fluctuation refers to the maximum amount that the price of a contract is allowed to move up or down in a single trading day. It is typically expressed as a percentage or a fixed amount. On the other hand, the initial margin is determined based on various factors such as the volatility of the underlying asset, regulatory requirements, and the broker's risk management policies. It is not directly tied to the maximum daily price fluctuation.

In conclusion, the false statement is D, as the initial margin on a contract does not approximately equal the maximum daily price fluctuation of the contract.