The AvaOptions platform determines the required margin based on how risky your portfolio is, using a method named SPAN (Standardized Portfolio Analysis).
Here’s how it works. We break down your portfolio by currency pair and then assess the value of each pair under 16 different scenarios:
|Spot Price Change||Volatility Change||% of Risk|
|Down 2/3 Margin%||Up||100%|
|Down 2/3 Margin%||Down||100%|
|Down 1/3 Margin%||Up||100%|
|Down 1/3 Margin%||Down||100%|
|Up 1/3 Margin%||Up||100%|
|Up 1/3 Margin%||Down||100%|
|Up 2/3 Margin%||Up||100%|
|Up 2/3 Margin%||Down||100%|
|Up 2 * Margin%||Unchanged||35%|
|Down 2 * Margin%||Unchanged||35%|
Scenarios 1-14 evaluate your portfolio with changes in market volatility at seven different levels: -1%, -.67%, -.33%, Unchanged, +.33%, +67%, and +1%. For instance, if the margin requirement for a currency pair is 1%, these are the seven levels we look at.
Scenarios 15 and 16 consider a market movement up and down by double the margin requirement (e.g. 2%), then take 35% of any portfolio change as the risk. These scenarios aim to capture the risk associated with options that could lose more value without affecting the margin for spot positions.
The biggest loss from these 16 scenarios is taken as the margin for each currency pair. Adding up all the margins for each currency pair gives you the total Required Margin.
Please note that for a portfolio composed solely of spot positions, the SPAN margin is identical to the Margin% multiplied by the total spot position. This aligns with most spot trading platforms, and neither implied volatilities nor scenarios 15 and 16 impact this.
In AvaOptions platform each option’s implied volatility (a measure of the market expectation of price change) is adjusted using the following formula:
Vol Shift = Volatility Factor X Max(Implied Vol, Minimum Vol)
Here, Implied Vol refers to the current mid-market implied volatility of the option, and the Minimum Vol is set at 10%.
Table of Volatility Factors:
|Days to Expiration||G10||EM|
For instance, for a 2-week G10 option, the implied volatility can be adjusted up or down by 22%, but in steps of no less than 2.2. For a 6-month option, it’s adjusted by 9%, but in steps of no less than 0.9.
The Volatility Factor serves to balance out the volatility of volatility, as a 1-week option’s implied volatility can change more drastically than a 1-year option’s. Its calculation involves the following formula:
Volatility Factor = SQRT( 30/ADTE ) * Reserve
In this formula, ADTE refers to the Days to Expiration, with a minimum of 7 and a maximum of 90. The Reserve is set at 15% for G10 currency pairs and 20% for pairs that include one or more emerging market currencies.