Effective 26th October, 2015

Calculation

The FX Expiry Margin model calculates the maximum future loss in a given FX option strategy using the current market prices. If there is an unlimited loss either upwards or downwards (spot price limited to 0), we look at the potential exposure at expiry of 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.

Collateral

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.

Example

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).