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One concept that test takers have issues with on the futures exams, is open trade equity. Open trade equity is simply the total amount of the trader’s margin deposits, plus or minus the unrealized profit or loss on an open contract position. The term gets its name from the fact that the established contract position remains open and has not been offset.
The open trade equity (OTE) is calculated based on the initial margin deposit plus or minus any unrealized profit or loss on the open contract position. Adverse price moves will cause the customer’s OTE or margin balance to fall. Maintenance margin is the minimum equity that a customer must maintain to hold the open futures position. If the customer’s equity falls below the minimum maintenance level, the customer will get a call for additional or variance margin. Once the equity in the account falls below the maintenance margin level the customer will be required to deposit enough margin to restore the account to the initial margin requirement. A customer who receives a call for additional margin may meet the call by depositing additional funds from a bank, by transferring funds from another account, or by liquidating futures contracts to restore the required equity. In addition to marking to the market it is important to monitor the customer’s account balance and total equity to determine the status of the customer’s account. A customer’s account balance is the total amount of deposits minus any withdrawals. The customer’s total equity is found using the following formula:
total equity = account balance +/ – open trade equity
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