Federal Call

Posted in Finance, Accounting and Economics Terms, Total Reads: 252
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Definition: Federal Call

A call option, often labeled a call, is a financial contract between 2 parties, the buyer and the seller of an option. The buyer of the call option has the right, but not the obligation to buy an agreed quantity of a particular commodity of the underlying financial instrument from the seller at a certain time, for a certain price i.e. the expiration date and the strike price respectively. The seller (or ‘writer’) is obligated to sell the commodity or financial instrument to the buyer if the buyer so decides. The buyer pays a premium fee for this right.


A special type of a margin call which requires a trader to reserve cash in order to meet requirements set by the Federal Reserve on the amount of credit that the brokers may extend. As a yardstick, one can know that the margin requirements presently are 50% for equities. In instances of short sales, the margin requirements are between 100% and 150% of the current market value of the security which is being sold short. Regulatory authorities also have the power to change these margin requirements as they seem necessary.


Margin amplifies both gains and losses relative to markets taken as a complete unit. Therefore, the Margins regulation are in place to moderate the amount of risk which is present in the securities market.

 

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