1. What is Margin?
Margin is a good-faith deposit or an amount of capital one needs to post or deposit to hold the position.
Position Margin = Initial Margin + added/removed margin
Initial Margin = multiplier * quantity / （leverage * price）
2. Relationship between margin and leverage
Leverage allows traders to enter a position which is worth much more by committing only a little amount of money. The gain or loss is, therefore, greatly magnified.
Suppose BTC is currently trading at $10,000, a user intends to enter into a position worth 1BTC with leverage of 10.
The quantity of contracts opens = 1 BTC * 10, 000 USDT per BTC / Face value = 1 * 10,000 / 1 = 10,000
Margin needed = Face Value * Quantity / (BTC price * Leverage) = 1 * 10,000 / (10,000 * 10) = 0.1 BTC
Reminder: Higher leverage indicates a higher return, but also higher risks. Please make sure you understand the risk before you use high leverage.
3. Leverage, Initial Margin, Maintenance Margin, and Margin Rate
Leverage: The leverage user chose to open a position
Initial Margin Rate: 1/Leverage
Initial Margin = Face Value * Quantity / (Average Open Price * Leverage)
Maintenance Margin Rate (MMR): Minimum margin rate used to maintain the current position. Different maintenance margin rate may result in different liquidation price. If the underlying index price reaches the liquidation price, deleverage/liquidation procedure will be triggered.
Maintenance Margin Rate is used to calculate liquidation price,
Est. Liquidation Price (Long) = (1 + MMR) * Position * Face Value / ((Position * Face Value / Average Price) + Position Margin)
Est. Liquidation Price (Short) = (1 - MMR) * Position * Face Value / ((Position * Face Value / Average Price) - Position Margin)
Margin Rate = (Initial Margin + Unrealized PnL) / Open Value = (Initial Margin + Unrealized PnL) / (Position * Face Value / Average Price)
Suppose the latest contract price is $10,000, one user enters into a 10X leverage LONG position worth 1 BTC, which equals 10,000 contracts (Tier 1 Risk Limit). The maintenance margin rate requirement for this position is 0.5%.
At this moment, user’s Initial margin Rate = 1/10 = 10%
Margin = Face Value * Quantity /(Average Open Price * Leverage)= 10，000 * 1 / (10,000 * 10) = 0.1 BTC
Est. Liquidation Price = (1 + MMR) * Position * Face Value / ((Position * Face Value / Average Price) + Position Margin) = （1+0.5%）* 10000 * 1 / （（10000 * 1 / 10000)）+ 0.1） = $9136.36
If the latest contract price plunges to $9200 and the underlying index price is $9195
Unrealized PnL = Face Value * Quantity / Average Price – Face Value * Quantity / Latest Price =
Then the Margin Rate = (Margin + Unrealized PnL) / Position Value =（0.1 -0.086957 ）／（1*10000/10000）=0.00130／1=0.130%
Since the index did not reach the liquidation price, the position will not be deleveraged/liquidated.
4. Changing the margin on your position
User can increase or decrease the margin in all positions, this will help manage risks. Leverage and liquidation price will change automatically after the changes were made.