The AvaOptions platform utilizes the SPAN system (Standardized Portfolio Analysis) to determine the necessary margin based on the risk level of the portfolio. It applies standardized stressors to each currency pair.

To assess portfolio values, client portfolios are divided by currency pair and evaluated under 16 different scenarios:

Scenarios 1 to 14 assess portfolios with varying volatilities at seven spot levels. For a currency pair with a spot margin requirement of 1%, the spot levels considered are -1%, -.67%, -.33%, Unchanged, +.33%, +.67%, and +1%.

Scenarios 15 and 16 involve adjusting spots up and down by twice the margin requirement (e.g., 2%) and assign a risk of 35% based on the observed portfolio change. These scenarios aim to capture the risk associated with options that are further out of the money, while not affecting the margin for spot positions.

The highest portfolio loss observed among these 16 scenarios is used as the margin for that specific currency pair. The sum of all margins for each currency pair determines the total Required Margin.

It is worth noting that for a portfolio consisting only of spot positions, the margin under SPAN is calculated as the Margin percent% multiplied by the total spot position. This is similar to most spot trading platforms, and neither implied volatilities nor scenarios 15 and 16 have any impact on the margin.

For each option, the implied volatility is adjusted using the following formula: Vol Shift = Volatility Factor X Max(Implied Vol, Minimum Vol) where:

• Implied Vol represents the current mid-market implied volatility of the option.
• Minimum Vol is set at 10%.

Table of Volatility Factors:

To illustrate, let's consider the volatility adjustments for different option durations. For a 2-week G10 option, the implied volatility is shifted by +/- 22% with a minimum move of 2.2 vol. In the case of a 6-month option, the volatility is adjusted by +/- 9% with a minimum move of 0.9 vol.

The Volatility Factor is employed to normalize the volatility of volatility, recognizing that a 1-week option may experience more significant changes in implied volatility compared to a 1-year option. The formula for calculating the Volatility Factor is as follows:

Volatility Factor = SQRT( 30/ADTE ) * Reserve

where:

• ADTE represents the Days to Expiration, with a minimum value of 7 and a maximum of 90.
• Reserve is set at 15% for G10 currency pairs and 20% for pairs involving one or more emerging market currencies.

For more information, please visit our dedicated AvaOptions webpage.