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.