Mm (54 in) clear span

Initial margin Rates and SPAN Parameters

Following on from the "Beat the Experts" thread, John Philpott posed some excellent questions on the differences between the Value at Risk (VaR) and Standard Portfolio Analysis of Risk (SPAN) market-risk measurement methods.

His questions are highly on-topic, especially given the central-clearing mandate set to go into effect for Tier 2 firms on . The impact on such firms will include a significant drag on returns for their portfolios, if they are engaged in hedging strategies using cleared derivatives.

One of the significant causes of the drag, other than fees, is the initial margin (IM) required to be deposited upon trade execution to the Futures Commission Merchant (FCM), Clearing Broker and through to a clearing house. The IM needs to be maintained throughout the life cycle of the derivative trade. It is therefore essential to be aware of the difference between the IM calculation methods, which are usually either VaR based or SPAN based.

The brief Q&A below contains some of John's questions, but it also covers VaR and SPAN questions posed at a higher level. Obviously there's enough to explain about VaR and SPAN to cover an entire textbook, but for brevity I've chosen the select few questions below. If anyone wishes for me to delve deeper into the topics discussed (such as the different types of VaR, the various ways of measuring "shifts", more detail about how exchanges determine SPAN scanning ranges, etc.) i'd be happy to follow this up with a sequel to this post.

Q: On a high level, how are SPAN and VaR calculated?

A: SPAN uses 16 scenarios in which a risk factor (e.g. today's price, today's volatility), or combination of risk factors, are shifted by an amount determined by the clearing house. The portfolio market value (MV) is recalculated under the 16 different market shifts, and the differences between these and the original portfolio MV are calculated. The largest of these 16 differences, representing the most severe loss in market value, is used to set the SPAN requirement for the portfolio margin.

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Popular Q&A

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- Find Marginal Rate of substitution for a unit of CD at her initial endowment?

Catherine has 20 pieces of CDs (C) and 10 pieces of DVDs (D). She has a utility function of:
U= 30 C^0.4 D^0.6
Find Marginal Rate of substitution for a unit of CD at her initial endowment.
Peter, her neighbor is willing to trade with her 4 pieces of CDs for every piece of DVD. Explain how Catherine should trade with Peter.

very unlikely that i can work out such a sum!

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How do you calculate the marginal rate of technical substitution?

How would you calculate the marginal rate of technical substitution between factor H and J when you have the production relationship J=A.(q^S1).(H^-S2)
q represents the rate of output and A, S1 and S2 are parameters

In economics, the Marginal Rate of Technical Substitution (MRTS) - or Technical Rate of Substitution (TRS) - is the amount by which the quantity of one input has to be reduced ( − Δx2) when one extra unit of another input is used (Δx1 = 1), so that output remains constant (y=y^-).
MRTS(x1, x2) = -(Δx1/Δx2) = (MP2) / (MP1)
where MP1 and MP2 are the marginal products of input 1 and input 2, respectively, and MRTS(x1,x2) is Marginal Rate of Technical Substitution of the input x1 for x2.
Along an isoquant, the MRTS shows the rate at which one input (e.g. capital or labor) may be subst…

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