The FX Expiry Margin model calculates the maximum future loss in a given FX option strategy given the current market prices. If there is an unlimited loss either downwards (spot price limited to 0) or upwards, we look at the potential exposure at expiry in these intervals and apply spot margin requirement on the entire notional.
If the strategy has both a maximum loss and an unlimited loss downwards and/or upwards, the margin requirement will be the maximum of the three calculations.
In any case, evaluating the potential outcome of the options, the margin requirement will be capped to the absolute maximum potential exposure multiplied by spot margin requirement. This will ensure that we always have a margin requirement smaller than or equal to the margin requirement of an equivalent spot position.
The calculations are done per currency pair and per expiry.
The model allows for netting with spot if the spot is in the same currency cross as the options. The model allocates any available spot to the option strategy (per expiry and nearest expiry have priority), such that the absolute maximum potential exposure at expiry is minimized. Any spot that is left and is not allocated to an expiry will be margined as a spot position. This means that any remaining spot will have single currency netting with other spot currency pairs in the portfolio.
For each expiry and currency pair, we evaluate the net value of an option strategy. If the net value of an option strategy for one expiry is positive, the model will deduct this value from the client collateral. This means that the client cannot use the value of the options for margin trading. If the net value of an option strategy for one expiry is negative, there is no collateral deduction.
EURUSD spot is trading at 1.09, and a client is entering a 1 million EURUSD short call spread at strike 1.10 and at strike 1.11 with expiry in two days. The maximum loss is the difference between the strikes, so 1,000,000 x 0.01 = 10k USD. There is no potential unlimited loss downwards or upwards.
The absolute maximum potential exposure at expiry is 1 million, since this will be the case if the short leg of the spread expires in-the-money and the long leg of the spread expires out-of-the-money. So the margin requirement will be the minimum of the maximum loss (10k USD) and the margin requirement for 1 million spot position.
Had EURUSD spot been at 1.105, i.e. having an unrealized loss of 5k, the margin requirement would be 5k USD. (maximum future loss)
The margin requirements for FX Vanilla Option at Luminor take into account changes in:
The margin requirements for FX Vanilla Option positions at Luminor consists of two components:
The margin requirement of a FX Vanilla Options position is: Margin Required = Delta Margin + Vega Margin
The Delta of an FX Option position describes how the value of the option changes as a result of changes in the underlying FX spot rate.
The calculation for the Delta Exposure and Delta Margin requirement of a Forex Option position is:
Delta Exposure = Notional Amount * Delta
Delta Margin = Delta Exposure * Forex Spot Margin Requirement
When calculating the Delta Margin requirement for a new FX Option position, all of the portfolio’s current spot exposures at the client's account with Luminor including any sub-accounts - both open FX spot positions and FX Option spot exposures – are considered.
The Vega of an FX Vanilla Option position describes how the value of the FX Option position changes as a result of changes in the implied volatility of the underlying FX cross.
The calculation for the Vega Margin component of a Forex Option position is:
Vega Margin = Notional Amount * Vega * Max (Implied Volatility, Floor Value) * Volatility Factor
A floor value of 20% apply. Read more about the Volatility Factors below.
Volatility Factor is set per Currency Pair and Expiry Date tenor. Between these Expiry Date tenors the Volatility Factor is interpolated. The Volatility Factor for short dated Expiry Date is higher than those for long dated Expiry Dates because the volatility of a long-term Forex Option position is relatively less dynamic than a short-term Forex Option position.
When calculating the Vega Margin requirement for a Forex Option position, netting is performed across each Currency Pair for each Expiry Date. Thus, if a client has both bought and sold Forex Options in the same Currency Pair and for the same Expiry Date, the Vega Margin is calculated as the net of these positions.
See the sample calculation of the Volatility Factor used in the Vega Margin calculation for major and minor currency pairs. As noted above, Volatility Factor is interpolated between the expiry date tenors.
|Tenor||Days||Major Currency Pairs||Minor Currency Pairs|
|Short Positions||Long Positions||Short Positions||Long Positions|
A Major Currency Pair is the pair which includes BOTH currencies from the list: AUD, CAD, CHF, EUR, GBP, JPY, NOK, NZD, SEK, USD
There is no margin required to hold long FX Vanilla Option positions if:
If you only hold bought FX Vanilla Options, then no margin is required to hold the FX Vanilla Option positions. However, cash is required to pay the Premiums for the bought Forex ptions.
If you, in addition to bought options, choose to trade in margin instruments (Spot and sold options) that would change the delta exposure in your existing portfolio. Hence, the Delta and Vega margin methodology applies to the entire portfolio in the given currency cross(es).
This would include an option being exercised into a Spot trade at expiry. Squared positions for FX Vanilla or Forex spot are not taken into consideration.
Note that margin requirements may be changed without prior notice. Bank has a right to chenge margin requirements for big positions, also for risky portfolios.
Margin Trading carries a high level of risk to your capital with the possibility of losing more than your initial investment and may not be suitable for all investors.
Ensure you fully understand the risks involved and seek independent advice if necessary.
See our Risk Warning.