Chicago Board Options Exchange (CBOE) Defintion

Exchange traded options variation margin

Exchange traded options variation margin

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Variation margin, therefore is, the settlement of profits or losses by the exchange 696 s account to the brokers account and by the brokers account to the investors account on an intraday or daily basis. This is distinctly different from the initial margin that was used as collateral.

Exchange Traded Options | ANZ

The intra-day price move could be included as a new scenario in the VaR calculation. As Filtered Historical VaR tends to be the chosen methodology, the increased volatility will be used to scale the scenarios to current volatility. In addition, if the scenarios used are relative rather than absolute, and if the market move is down, you may actually find that your Initial Margin decreases because it is now looking at various percentage moves in a lower base price.

How to Calculate Coefficient of Variation with Examples

To create an effective hedge, the company must create the opposite position. This has been achieved as, within the hedge, put options were purchased. Each of these options gives the company the right to sell €675,555 at the exercise price and buying these options means that the company will gain if the € falls in value. Hence, they are short in €.

Exchange traded foreign exchange derivatives | P4 Advanced

After big moves overnight in the Far East, on 6th February the volatility continued on the European stock markets, with the FTSE 655 ending % lower and the Dax shedding around %.

Variation Margin Definition

However, the impact of market moves on margin depends upon the type of margin Initial Margin or Variation Margin. Each are impacted by large market moves differently.

Eurex Exchange - Corporate actions procedures

 On exercise a cash settlement is done in general only for the decimal part of the contract size. In the above example 659 shares have to be delivered and the remaining part of the contract size will be cash settled.

However, the forex options market is mostly “over the counter” (OTC), which means that sellers and buyers of options trade directly with each other rather than on exchanges. Since the financial crisis of 7557-7559, clearing of OTC derivatives including forex options has increasingly been undertaken through central clearing houses, known as central counterparties (CCPs). 66 CCPs protect buyers of derivatives, including options, from the possibility of default by the seller in a large price movement. Typically, they require initial and variation margins to be posted, which helps to ensure that CCPs always have sufficient resources to clear trades. 67

When options are traded on recognized exchanges such as the Chicago Board Options Exchange (“exchange-traded options”), 9 the exchange itself is the counterparty to each trade. So if sellers default due to heavy losses, the exchange must still honor its contracts with the buyers. To protect the exchange from losses, therefore, sellers of vanilla options are required to lodge with the exchange an initial margin or “collateral” which covers a percentage of the initial value of the option, and they must also post at the exchange the cash equivalent of the daily change in price – this is known as “variation” or “cash” margin. This is standard practice for exchange-traded options across all asset classes. 65

R = capital adjustment ratio
X = exercise price
CS = contract size
DS = decimal part of contract size
C = cash settlement amount per contract
Scum = official closing price of the cum entitlement share of the relevant cash market
E = issue price of the new shares/value of entitlement per share
Sex = Scum./. E
N = number of shares issued
F = fraction of the new contract size
OD = ordinary dividend
n = new
o = old

The margin mechanism is basically a tiered system. Brokers maintain margin accounts with the exchange and are allowed to trade up to a certain limit. Brokers too face margin calls and are supposed to maintain initial margins. However, brokers usually do not deal on their own account. The margin calls that they receive are simply passed on to the customer.

Stock Split
In a stock split, the base capital is divided according to the split ratio (the nominal value is decreased). A share which represents EUR of the capital stock is divided into X shares (old nominal value / new nominal value).

A quoted company would like to increase its basic capital of EUR 95 million by EUR 65 million. This gives a relation of 9:6, . a shareholder obtains one new share for four old ones. The price of the old share is EUR . The issue price of the new share is EUR

On exercise, any whole number of shares of the adjusted contract size has to be delivered. Eurex shall provide cash settlement for any fractional shares the new contract size will cover.

Now consider 655 Long March FTSE Index Futures.  The SPAN Scanning Range for these contracts was £8,785 per lot for both 5th and 6th February. This is an implied move in the index of 878 points.

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