Question

1. SPAN was developed in 1988 to compute risk margin for portfolios of futures and futures options. SPAN is still in use today. Explain how SPAN produces risk margin for futures and futures options portfolios.

Answer 1

SPAN is an abbrevation for Standardized Portfolio Analysis of Risk. SPAN margin is a system which is used to calculate Standardized Portfolio Analysis of Risk and has been adpoted majorly by all option and future exchanges in the world. SPAN works on a set of algorithms which help in determining the margin requirements according to a portfolio assessment of a day's risk for a trader's account.

It is important to note that SPAN:

1) Helps in determining the margin requirements according to a portfolio assessment of a day's risk for a trader's account

2) SPAN through its set of algorithms and modeled risk scenarios helps to set margin of each position in options, futures or derivates to its worst possible one day movement. This movement is calculated by a risk array which helps to determine the possible gain or loss for each contract under different set of risk scenarios. These risk scenarios are conditons which help to measure gain or loss with respect to a change in price, volatility change or if there is a decrease in time of expiration.

To run the model main inputs are strike price, risk free interest rate, volatility change, decrease in time of expiration. After the margin of each position is calculated, the system can shift any extra margin to a new position.