How to calculate the average MER (margin to equity ratio)? Assume that I open a futures account with a FCM and I deposit $100,000 in my account. Each business day, I will have some following information for my account: 1. My account equity balance daily --- Initially, it will be $100,000. But after that, it will change virtually every day if there is positions and if I take interest, etc into consideration, etc. 2. The total of margin used daily --- It is the sum of all margin (performance bonds) for all position daily. If there is no long/short position, the total of margin used for such day will be 0. 3. Based on 1 and 2 above, I can calculate the MER (margin to equity ratio) per each business day (MERD). MERD = (the total of margin used daily)/(my account equity balance daily). 4. Assuming there is 252 business days, I will have 252 MERD (from MER1 to MER252) for my account for any year. Question I have is that now I have 252 MERD (MER1 to MER252), how do I calculate the average MER for the year? A. The average MER is the average of all MERD. MER = (MER1 + MER2 + ⦠+ MER252)/252 B. Or other method? Is option A above correct? Or there are some other ways to do it?
Hi, I just use the former... I do an arithmetic average. I doubt anyone really cares if your ME average is 20% or 22.5%. They just want to know if you're 20% or 60%. I actually "tweak" the margin/equity numbers I get from my broker to get what I think is a more meaningful number. The issue for me is that sometimes I have (covered) option positions which go from ATM to deep ITM, which will bias the result. It adds the ITM amount to both margin *and* equity, which means the ME ratio will go up. So, I take my margin/equity number, and subtract the "in the money" number (which my broker conveniently provides) from both. I call it my "if everything was OTM" (because my covered call position could be arb'ed into an OTM put) M/E ratio.
Take the initial margin requirement from your daily statement and divide it by the days beginning trading level. The simple average as expressed in option A is common practice. Just because you have $100k on deposit, doesn't mean that is your trading level. If you have a system that only uses 10% max M/E, you may have a $500k trading level that is just notionally funded with $100k. This is fairly arbitrary, and should be targeted to the desired return/risk/vol that you want to market to investors. Some notes to this, though: The max M/E should also be stated. If you do much intraday trading, you should take your max position size(s) and multiply times the INITIAL exchange margin requirements. If intraday is considerably higher than overnight, state both. Just because you may get reduced margins for intraday trades, doesn't mean that your investor has the same deal at their clearing FCM. If just calculating overnight margins, you should still use the INITIAL exchange margin requirement and not the maintenance margin. Do not fudge these numbers. Many institutional investors use them as risk metrics (parameters) and will shut you off if you exceed your max allowable margin usage. If the investor has multiple managed accounts with different CTA's, they are not going to be fully funding every account (likely will have a separate master account to cover margin for all their sub-accounts), so this is an important number to them.