A futures exchange imposes an initial margin:
A) as the exchange needs to make a profit.
B) as it gives the client trader more leverage.
C) to ensure brokers and traders are able to pay for any losses incurred over the life of the futures contract.
D) the exchange wants to ensure that futures contracts are closed-out.

Question

Quizplus · Accepted Answer

The initial margin is imposed to ensure brokers and traders are able to pay for any losses incurred during the life of the futures contract. This is important for the stability of the market and to prevent defaults or losses that could impact the integrity of the exchange. The other choices are incorrect - the exchange does not impose initial margin to make a profit (it charges fees and commissions instead) or to give traders more leverage (it actually limits leverage through margin requirements). Finally, while the exchange wants to ensure that futures contracts are closed-out, this is not the reason for imposing initial margin specifically.

A Futures Exchange Imposes an Initial Margin