Margin Effects On Firms' Futures Investment

The main reason that firms invest futures is to hedge price risk through hedging in futures markets. But futures markets is a individual markets that differ from cash markets, only hedging in futures markets not only cannot achieve the hedging results, but also make the firms suffer large losses .So during the firms hedge in futures markets, they also speculate on the hedging position. We regard the hedgers as utility-maximizing investors, to maximize their utilities they both speculate and hedge in futures markets, when speculation makes profits they will liquidate the open positions or they will cut the positions and apply hedging positions immediately. To doing this, their ultimate aim is to obtain good efficiency of capital using.Margin requirements provide the traders with substantial leverage, economize their capital cost, but futures markets are regard as high risk markets just because of the existing of margin system."Marking-to -market" makes the firms facing the problems of controlling capital flow risk,because once the balance of traders' margin account cannot maintain holding the open positions ,they meet margin calls, or their positions will be forced liquidated. Those potential risks put forward a series factors to be considered for the firms when they plan futures investment, such as the right time when they should invest, how much capital reserve they should determine for the whole trading, how to control their investment tactics and how much hedge ratio they should choose. Etc.This article addresses margin effects on firms' futures investment from the viewsof firms. Through contrasting the margin system of China futures markets with those of international markets, it points out the shortage of our current margin system .It also discusses to apply Blank's capital requirements models in China futures markets and addresses the issue related to determining the threshold level of funding required for uninterrupted operation as a futures hedger in empirical assessments. This article also indicates capital requirement and exchange cost effects on firms' futures investment behavior to be significant, depending on that persons' degree of risk aversion. Considering the effects of capital requirement and exchange cost, to improve the efficiency of capital using, firms will choose reasonable hedge ratio base on their situation of produce and sale and their operational goals, combined with price trend, and they will deal with the positions actively.Finally this article presents some suggestions of reasonable margin system, reasonable ways of capital reserve, optimal hedge ratio and available investment tactic for the firms.