Margin Calculation

The SentryOptions platform calculates required margin according to the riskiness of the portfolio, applying standardized stresses to each currency pair using a system known as SPAN, for Standardized Portfolio Analysis.

We divide customer portfolios by currency pair, and evaluate portfolio values for each currency pair under 16 scenarios:

Scenario Spot Price Change Volatility Change % of Risk
1 Down Margin% Up 100%
2 Down Margin% Down 100%
3 Down 2/3 Margin% Up 100%
4 Down 2/3 Margin% Down 100%
5 Down 1/3 Margin% Up 100%
6 Down 1/3 Margin% Down 100%
7 Unchanged Up 100%
8 Unchanged Down 100%
9 Up 1/3 Margin% Up 100%
10 Up 1/3 Margin% Down 100%
11 Up 2/3 Margin% Up 100%
12 Up 2/3 Margin% Down 100%
13 Up Margin% Up 100%
14 Up Margin% Down 100%
15 Up 2 * Margin% Unchanged 35%
16 Down 2 * Margin% Unchanged 35%

Scenarios 1-14 evaluate the portfolio with volatilities higher and lower at seven spot levels.  For a currency pair with a spot margin requirement of 1%, the spot levels are -1%, -.67%, -.33%, Unchanged, +.33%, +67%, and +1%.

Scenarios 15 and 16 move spot up and down by double the margin requirement (e.g. 2%), and take 35% of the observed portfolio change as risk.  These scenarios are designed to capture risk of options that are further out of the money, without impacting margin for spot positions.

The greatest portfolio loss observed in these 16 scenarios is taken as margin for that currency pair.  The sum of margin for each currency pair is the total Required Margin.

One may note that for a portfolio of spot positions, the margin under SPAN is equal to the Margin% times the total spot position, identical to most spot trading platforms, and neither implied volatilities nor scenarios 15 and 16 have any impact.

Each option’s implied volatility is moved up and down according to the following formula:

Vol Shift = Volatility Factor X Max( Implied Vol, Minimum Vol)

where

Implied Vol = the current mid-market implied volatility of the option

Minimum Vol = 10%

 

Table of Volatility Factors:

Days to Expiration G10 EM
7 31% 41%
14 22% 29%
30 15% 20%
90 9% 12%

For example, a 2 week G10 option implied volatility is shifted +/- 22%, with a minimum move of 2.2 vol.   For a 6 month option, vol is bumped +/- 9%, with minimum move of 0.9 vol.

The Volatility Factor normalizes volatility of volatility, as a 1 week option’s implied volatility can move more drastically than can that of a 1 year option.  Its math is as follows:

Volatility Factor = SQRT( 30/ADTE ) * Reserve

where

ADTE = Days to Expiration, with minimum of 7 and maximum of 90.

Reserve = 15% for G10 currency pairs, and 20% for pairs including one or more emerging market currencies.