Leverage

When doing leverage, we actually borrow money from the exchange.

A margin account is created and it should be above the initial margin requirement.

If the margin account is below the maintenance margin, the borrower receives a margin call.

Example

I short a future at \$10,000. The initial margin is 20% hence I need $2,000 in my account (= collateral).

Say the future now increases to \$11,000. My margin account is now worth \$1,000 (initial value + unrealized PnL).

Let’s assume the maintenance margin is 10% (calculated on the current value). I thus need \$1,100 in my margin account. Since I am below that level, I receive a margin call. The margin call tells me to either add funds (= “post collateral”) to the margin account or to reduce my short position.

If I don’t do so and the price continues to increase, there will be a liquidation. Note: most exchanges allow a partial liquidation.