What Is the Formula for Calculating Initial Margin under a Standard Portfolio Margining Model?
The standard formula involves calculating the theoretical profit and loss (P&L) of a portfolio across a range of predefined stress scenarios for the underlying asset (e.g. price movements, volatility changes). The initial margin is then set as the largest potential loss (worst-case scenario) identified in these simulations, plus an add-on for liquidity or concentration risk.
This approach is often called the 'SPAN' or 'VaR' method.
Glossar
Theoretical Profit and Loss
Valuation ⎊ Theoretical Profit and Loss, within cryptocurrency options and financial derivatives, represents a projected financial outcome derived from a model incorporating current market parameters, rather than realized gains or losses from executed trades.
Calculating Initial Margin
Collateralization ⎊ Calculating initial margin represents a preemptive capital requirement established by exchanges or clearinghouses to cover potential losses arising from derivative positions, particularly within cryptocurrency and options markets.
Standard Portfolio Margining
Principle ⎊ Standard Portfolio Margining is a risk-based methodology for calculating margin requirements across an entire portfolio of positions, encompassing both crypto assets and derivatives, by netting offsetting risks rather than calculating margin on a gross, position-by-position basis.