What is SPAN margin?
Even before we get into the details of this premise, it is important to know the full form of it: SPAN stands for standardized portfolio analysis of risk. SPAN margin is a standard method that has been adopted by most exchanges dealing in Options and Futures.
What it does is analyze risks about accounts based on a global assessment. This is done through a sophisticated set of algorithms. Once the assessment is done, the requirements are spelt out accordingly.
This should not be confused with the initial margin, which is an upfront payment made by the investor to the broker as a security, in lieu of investment from the latter.
The Basics Knowledge
Writers of Futures and Options have the onerous task of providing a sufficient margin to cover losses, in their accounts.
The SPAN system then starts analyzing the risk connected to each portfolio, through its intelligent algorithms. A risk array is used to calculate the profits and losses linked to each contract, under all conditions.
These conditions are called the risk scenarios and profits and losses are measured taking into consideration the change in price, change in the volatility and time decrease concerning expiration.
- The primary pillars of the model are:
- Risk-free interest rate
- Price change in the underlying securities
- Changes found in the volatility
- Time decrease in respect to expiration
Based on these calculations, will the algorithm decide about the movement of margins. It can keep the positions as they were or remove any excess margin from old positions to newer positions as they deem fit.
The existence of margin relative to portfolios is an important exigency and needs to be maintained to safeguard positions from untoward volatility. It is an instrument that has to be minutely calculated and adhered to.
Let us have a look at How Institutions and Organizations work on it:
SPAN margin NSE is extremely prudent about. It does understand the underlying volatility of securities.
Hence it tries to safeguard them by explicitly directing writers to provide sufficient margins. The NSE SPAN margin portfolio can be downloaded through the NSE F&O span margin file download.
The NIFTY SPAN margin table provides us with the intraday leverages based on NRML margins and the rates.
The MCX SPAN margin table has the following heads:
- Expiry Date
- SPAN margin
- Exposure Margin based on LTP
- Total Initial Margin
- Additional Margin
- Special Margin
- Tender Margin
- Delivery Margin
- Additional Pre Expiry Margin
- Check Exposure limit
The Zerodha SPAN margin calculator gives us a fair idea about the trading volumes and all the other relevant details, required for the trader to make an informed decision.
The Zerodha F&O calculator was one of the first online calculators designed to provide comprehensive requirements. The Zerodha margin list is also an able accompaniment which informs traders about the day’s listings and positions.
The Zerodha commodity SPAN margin provides a comprehensive outlook on commodities and their intraday positions.
The 5 paisa span margin provides us with the detail of the intraday trade along with the following information:
The Span Margin, the exposure margin and the total margin in percentages. Other than that it also provides us with the price per share other than a whole lot of other information. It comes with a margin calculator which is quite an excellent tool, helping the investor take an informed decision.
The NCDEX Span margin follows a similar methodology like the rest of the lot.
Which brings us to the question, what is the commodity span margin?
It is similar to the margin one would have while dealing with Futures and Options. A kind of cushion against volatility and safeguarding of securities.
It is also important to remember, that it is now mandatory for brokers to retrieve SPAN plus Exposure margin to carry forward the Futures and Options positions over to the next day. This order has been constituted by SEBI and is a prerequisite for trading.
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Differences Between Span and Exposure Margin
We now know what a SPAN margin is. It is a cushion created to protect the commodity or the security from any volatility. Or in layman terms, cover for any losses.
The exposure margin is an additional margin, over and above the SPAN margin, which ideally gives more protection to the said entity.
This margin is primarily created to create a wall of protection around the broker’s liability, against wild swings of the market and other unforeseen circumstances.
Together they add up to, what we call the Total Margin.
TOTAL MARGIN = SPAN MARGIN + EXPOSURE MARGIN
|SPAN margin||Exposure margin|
|It is the initial margin which is calculated on the risk assessment on particular portfolios, taking into account market volatility||Exposure margin is an ad hoc cushion created over and above the SPAN margin, to provide additional protection to the said portfolios|
|It is never a fixed entity and it keeps changing based on the volatility of the asset||Exposure margin is usually a fixed entity since its only focus is to provide additional cover against market upheavals|
It is important to note that both the SPAN margin and exposure margin is mandated by the exchanges. So while trading for Futures, the client has to respect the initial margin necessity. Also, the exchange blocks the entire total margin ie. SPAN margin + exposure margin, at the initial stage itself.
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How is the Exposure Margin Calculated?
For index futures Exposure margins is usually 3% of the entire value of the contract. The calculation would be like:
The Value of the NIFTY contract is worth: INR 4,00,000. The exposure margin would be 3%. That amounts to INR 12,000. This is for NIFTY futures.
For stocks, derivatives, and options, the exposure margin is usually 5% or 1.5 times the Standard Deviation. Whichever is calculated to be higher?
It is also important to remember the places where the exposure margin will be applicable:
F&O segment in the NSE and commodity derivatives in MCX.
Margin Risk and Benefits
Now, that we have a fair idea about it, let us delve into the basic features of it. To begin with, the parameters which determine the SPAN margin:
- Scan risk: The price sings that might occur to an instrument and the range of movement is one of the deciding factors for it
- Volatility: This by far is the most common reason for the creation of SPAN margins. When volatility occurs, the prices move wildly. A volatility range is fixed, depending on the research of previous volatilities. The maximum change is studied, and it is decided upon.
- Spreading parameters of Intra-commodity: Evaluation of risks of portfolios depends on a set of rates and rules.
- Spreading parameters of Inter-commodity: Similar to the above point, evaluation of risks of related products depending on the rates and risks.
- Risk Factors associated with Delivery: An evaluation is done against the increased risk of positions of products that are to be physically delivered, especially nearer to the date of their delivery period.
During the day, at least once, during trading hours, every exchange, as a ritual, does a risk evaluation using the SPAN methodology, to calculate the risk arrays against all its products and prepares a SPAN risk parameter file.
The SPAN methodology is used, citing the above-explained parameters.
The Initial margin is charged to an investor, on the principle of the assumption that the investor is going to carry the position in his or her account, till the contract’s expiration.
Hence, initial margins are also called carry forward margins, since it allows the investor to carry it over to the next day. This initial margin is a combination of two components: SPAN margin and exposure margin.
It, as we know, is the value put on a product based on its Value at Risk and the exposure margin, as discussed earlier, is a value calculated based on the degree of exposure.
The initial margin has to be a pretty large amount. This is to cover 99% of the loss that one might face whilst trade.
The usual rule is greater the risk which stems from higher volatility and hence bigger the initial margin.
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How to Calculate the SPAN Margin?
The 5 paisa SPAN margin calculation methodology is:
Step 1: One has to select the Exchange on which the trading needs to be done
Step 2: Now the product has to be selected. Could be either Futures or Options
Step 3: The ticker symbol on the scrip, which you wish to trade, has to be selected
Step 4: The type of trade now needs to be selected. It either has to Put or Call
Step 5: The expiry date of the trade is important information that now needs to be selected.
Step 6: In case you have selected options, the strike price has to be selected.
Step 7: The lot size of your trade now needs to be entered
Step 8: All set for your SPAN calculation
Every trading firm has its span margin calculator. Most trading exchanges like MCX provide its members with a sheet-like MCX span margin pdf which helps them to analyze positions. T
he MCX span margin is based on all the commodities that are traded on the exchange.
We have throughout the article seen quite details, the span margin meaning and how it helps cushion products from the volatility of the market. It is primarily a tool to protect portfolios and their positions against wild price changes.
It along with the exposure margin, which forms the second layer of protection, is an ideal way to secure oneself from untold losses.
It is also the same reason why Exchanges block the margin cost upfront to cover for any future losses.
As has been stated earlier. The greater the risk borne out of higher volatility, the more the SPAN margin.
Every trading company has a SPAN calculator which is of immense help and importance. It serves an essential purpose of informing traders about the money that would be blocked by the exchange as security.
SPAN Margin FAQs
Q1: What is a SPAN margin?
A-SPAN margin or Standardized Analysis of Risk margin is a minimum margin required for Future and Options positions. This is as per the mandate of the exchanges. This is required to safeguard the portfolio from any kind of market volatility.
Q2: How SPAN margin is calculated?
It is calculated based on scenarios using a risk array. Profit and losses are calculated taking into account conditions of erratic price changes, volatility and a decrease in time to expiration.
Q3: What is the difference between Span and Exposure margin?
SPAN margin is the value provided as security against volatility and risk while exposure margin is the value calculated against the degree of exposure.
Q4: What is the Initial Margin?
It is the money to be paid upfront by the investor to the broker as security for future investments.
Q5: Does the Initial margin change?
The initial margin is dependent on the volatility of the underlying asset. The changes are not frequent though.
High Margin Broker List:
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