Question

Determine whether each of the following statements is TRUE or FALSE, and write a short explanation for your answer ​​​​​​​

1. The margin requirement in a forwards contract ensures that each party places a certain amount of money to cover potential losses on their position.

Answer 1

The answer is False

An account holder must first post a certain amount of cash, bonds or other collateral, known as the initial margin requirement, to open a margin account at a brokerage firm. A margin account encourages investors, traders, and other market participants to use leverage to buy securities with a total value greater than the account's available cash balance. A margin account is basically a credit line in which the remaining margin balance is paid with interest. Margin account securities are paid for with cash loaned by the brokerage firm to the account holder and are used as collateral. This method allows potential profits to be magnified but also magnifies potential losses. To cover the loss, the account holder must deposit the full initial value of the securities in cash or other liquid collateral in the extreme event that securities purchased in a margin account decline to zero value.