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| CASE 2 |
The same logic holds when ActiveMargin™ receives more than 2 orders, as also combinations of futures and options. The possible number of scenarios increase exponentially, but ActiveMargin™ is able to compute the margin on the worst case scenario in real time, and collect only that much money that is required to support the worst case. Consider a case where the client places $130,000 as deposit, and send these orders in sequence:
1. Purchase of 100 lots of 30-Year US T-Bond Dec Futures
2. Sale of 200 lots of 10-Year US T-Note
Dec Call Option at 106 strike
3. Purchase of 300 lots of 5-Year US T-Note
Dec 2006 Dec Put Option at 104.5 strike.
Assuming the first two orders have been
accepted using the same logic as above, when ActiveMargin™ receives the third order (while the other two are still unexecuted), the scenario
analysis is as in the table. |
| Scenario # |
Description |
Required Margin |
| 1 |
Buy order for 100 lots of 30-Year US
T-Bond Dec Futures is executed, but the others are not |
$90,000 |
| 2 |
Sell order for 200 lots of 10-Year US T-Note call options is executed, but the others are not |
$115,000 |
| 3 |
Buy order for 300 lots of 5-Year US T-Note Put options is executed, but the others are not |
$18,900 |
| 4 |
The first 2 orders are executed, but the order for put options is not |
$43,000 |
| 5 |
The second and third orders are executed, but the first is not |
$128,700 |
| 6 |
The first and third orders are executed, but the call option is not sold |
$82,100 |
| 7 |
All three orders are executed |
$56,700 |
|
|
If the 3 orders were margined individually, the total margin to be collected would have been calculated at $ 223,900/-, while the worst case portfolio margin works out to only $128,700/-, thereby providing an additional trading space of about 73%, without any increase in risk.
This situation can be extrapolated to a case where there are very many trades and pending orders, and it is easy to see that the margin savings that can be achieved by pre-trade portfolio margining is substantial. In many cases, the margin values computed by ActiveMargin™ can provide up to 100% increased trading space to end clients, with no increase in risk to the broking firm. |
In the examples, the following points are noteworthy:
1. The reduction in margin is not accompanied by any increase in risk to the broking firm, since the worst case scenario is well covered.
2. The margin collected by ActiveMargin™ uses,
and is in line with the exchange margining methodology, whatever be the exchange. This ensures that the broker does not go out of funds at the end of the day while making payments to the exchange. |
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