Financial Daily from THE HINDU group of publications
Sunday, Mar 13, 2005
Financial Daily from THE HINDU group of publications Sunday, Mar 13, 2005 |
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Investment World
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Derivatives Markets Markets - Derivatives Markets SPAN to track risks
The objective of SPAN is to identify overall risk in a portfolio of futures and options contracts for each member. The system treats futures and options contracts uniformly, while at the same time recognising the unique exposures associated with options portfolios such as extremely deep out-of-the-money short positions, inter-month risk and inter-commodity risk. Because SPAN is used to determine performance bond requirements (margin requirements), its overriding objective is to determine the largest loss that a portfolio might reasonably be expected to suffer from one day to the next day. In standard pricing models, three factors most directly affect the value of an option at a given point in time: * Underlying market price* Volatility (variability) of underlying instrument, *Time to expiration. As these factors change, so too will the value of futures and options maintained within a portfolio. SPAN constructs scenarios of probable changes in underlying prices and volatilities in order to identify the largest loss a portfolio might suffer from one day to the next. It then sets the margin requirement at a level sufficient to cover this one-day loss. * Mechanics of SPAN * Composite Delta * Risk Arrays * Composite Delta * Calendar Spread or Intra-commodity or Inter-month Risk Charge * Short Option Minimum Charge * Net Buy Premium (only for option contracts) * Computation of Initial Margin - Overall Portfolio Margin Requirement * Black-Scholes Option Price calculation model Mechanics of SPAN: The complex calculations (e.g. the pricing of options) in SPAN are executed by the National Securities Clearing Corporation. The results of these calculations are called Risk arrays. Risk arrays, and other necessary data inputs for margin calculation are then provided to members in a file called the SPAN Risk Parameter file. This file will be provided to members on a daily basis. Members can apply the data contained in the Risk parameter files, to their specific portfolios of futures and options contracts, to determine their SPAN margin requirements. Hence members need not execute complex option pricing calculations, which would be performed by NSCCL. SPAN has the ability to estimate risk for combined futures and options portfolios, and re-value the same under various scenarios of changing market conditions. **SPAN{lcub}logicalnot{rcub}shy is a registered trademark of the Chicago Mercantile Exchange, used herein under License. The Chicago Mercantile Exchange assumes no liability in connection with the use of SPAN by any person or entity. (to be continued) source: ww.nseindia.com
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