Margin ratio
Family III · Risk
Not to be confused with margin, margin call, free margin.
Margin ratio expresses the relationship between the margin held for a position and the position's total notional value. It is a risk metric that indicates how much of the position's value is covered by the trader's own funds. Brokers may use it to determine margin requirements or to trigger risk warnings.
Calculation and Interpretation
The margin ratio is calculated as:
Margin Ratio = (Margin Required / Notional Value) × 100%
For example, if a position has a notional value of $100,000 and requires $5,000 in margin, the margin ratio is 5%. This means that 5% of the position's value is held as margin. A higher margin ratio indicates that a larger proportion of the position is funded by margin, which may imply higher leverage and risk. Conversely, a lower margin ratio suggests that the position is less leveraged.
Worked Example
Practical Considerations
The margin ratio is not a fixed number; it varies by broker, regulatory jurisdiction, and the specific instrument traded. For instance, some brokers may set a margin ratio of 2% for major forex pairs, while others may require 5% or more. Regulatory bodies such as ESMA in the EU and the FCA in the UK impose minimum margin requirements for retail clients, which can affect the margin ratio. Traders should check their broker's margin requirements and understand how the margin ratio impacts their account's risk exposure.
Often confused with
- margin
- Margin is the actual funds deposited to open and maintain a leveraged position, whereas the margin ratio is the percentage of the position's notional value that those funds represent; the margin is a dollar amount, the margin ratio is a percentage.
- margin call
- A margin call is a broker's demand for additional funds when the account's equity falls below the required margin level, while the margin ratio is a measure of the proportion of margin to notional value; a margin call is an event, the margin ratio is a metric.
- free margin
- Free margin is the funds available for opening new positions, calculated as equity minus used margin, whereas the margin ratio relates the margin used to the position's notional value; free margin is an absolute amount, the margin ratio is a relative measure.