FX Vanilla Options Margin
The margin calculation for FX Vanilla option at FAB Investing take into account changes in:
- Spot price of the underlying asset
- Existing open positions
Delta and Vega Margin
The margin requirements for FX Vanilla option positions at Fab Investing consist of two components:
- Delta Margin - related to the exposure to changes in the underlying Forex spot rate
- Vega Margin - related to changes to the exposure in the volatility of the underlying Forex cross.
The margin requirement of a FX Vanilla options position is:
Margin Required = Delta Margin + Vega Margin
The Delta of an FX option position describes how the value of the option changes as a result of changes in the underlying FX spot rate.
The Delta of an FX option position multiplied by the notional amount gives the underlying spot exposure of the position (i.e., Delta Exposure = Notional Amount * Delta). The spot exposure represents the size of the spot position required to hedge the FX option.
The calculation for the Delta Margin requirement of a Forex Option position is:
Delta Margin = Delta Exposure * Forex Spot Margin Requirement
When calculating the Delta Margin requirement for a new FX option position, all of the portfolio’s current spot exposures at the client's account with FAB Investing including any subaccounts - both open FX spot positions and FX option spot exposures – are considered.
The Vega of an FX Vanilla option position describes how the value of the FX option position changes as a result of changes in the implied volatility of the underlying FX cross.
The calculation for the Vega Margin component of a Forex Option position is:
Vega Margin = Notional Amount * Vega * Max (Implied Volatility, Floor Value) * Volatility Factor
A floor value of 20% apply.
Read more about the Volatility Factor below.
Volatility Factors are set per Currency Pair and Expiry Date tenor (see table below). Between these Expiry Date tenors the Volatility Factors are interpolated (see graph below).
The Volatility Factors for short dated Expiry Dates are higher than those for long dated Expiry Dates because the volatility of a long-term Forex Option position is relatively less dynamic than a short-term Forex Option position.
When calculating the Vega Margin requirement for a Forex Option position, netting is performed across each Currency Pair for each Expiry Date. Thus, if a client has both bought and sold Forex Options in the same Currency Pair and for the same Expiry Date, the Vega Margin is calculated as the net of these positions.
See the sample calculation for an example of this.
The Volatility Factors used in the Vega Margin calculation for major and minor currency pairs are shown below in tabular and graphical form. As noted above, Volatility Factors are interpolated between the expiry date tenors.
The next table shows the categorisation of currencies for Major Currency Pairs. With respect to these Volatility Factors, a Major Currency Pair is one which includes BOTH of any of the currencies listed.
Exceptions for bought Options
There is no margin required to hold long FX Vanilla Option positions if:
- You hold no sold options, and
- You hold no FX spot or forward positions in the same cross.
If you only hold bought FX Vanilla Options, then no margin is required to hold the FX Vanilla Option positions. However, cash is required to pay the Premiums for the bought Forex Options.
If you choose to trade in margin instruments (Spot forwards, or options) in addition to bought options, that would change the delta exposure in your existing portfolio. Hence, the Delta and Vega margin methodology applies to the entire portfolio in the given currency cross(es).
This would include an option being exercised into a Spot trade at expiry. Squared positions for FX Vanilla or Forex spot are not taken into consideration.
You should be aware that in purchasing Foreign Exchange Options, your potential loss will be the amount of the premium paid for the option, plus any fees or transaction charges that are applicable, should the option not achieve its strike price on the expiry date.
Certain options markets operate on a margined basis, under which buyers do not pay the full premium on their option at the time they purchase it. In this situation you may subsequently be called upon to pay margin on the option up to the level of your premium. If you fail to do so as required, your position may be closed or liquidated.
If you write an option, the risk involved is considerably higher than buying an option. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received.
By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you, however far the market price has moved away from the strike price. If you already own the underlying asset that you have contracted to sell, your risk will be limited.
If you do not own the underlying asset the risk can be unlimited. Only experienced traders should contemplate writing uncovered options, even then only after securing full details of the applicable conditions and potential risk exposure.
Trading risks are magnified by leverage – losses can exceed your deposits. Trade only after you have acknowledged and accepted the risks. You should carefully consider whether trading in leveraged products is appropriate for you based on your financial circumstances. Please consider our Risk Warning and Customer Agreement before trading with us.
Margin requirements can be changed without prior notice. FAB Investing reserves the right to increase margin requirements for large positions sizes, including client portfolios considered to be of very high risk.
It is your responsibility to ensure that the required margin collateral, as listed in the Account Summary on the trading platforms, is maintained at all times.
If the funds in your account fall below this margin, you will be subject to a margin call where you must either:
- Reduce the size of the open margin positions and/or
- Provide more funds (margin collateral) to the trading account.
When the required margin exceeds your margin collateral, you are at risk of a stop-out. In such a circumstance, FAB Investing is entitled to close ALL your margin positions on your behalf.