Page 187 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives Tanima Dutta, Lovely Professional University

Notes Unit 12: Risk Management of Financial Derivatives

CONTENTS
Objectives

Introduction
12.1 Risks Associated with Derivative Activities
12.2 Risk Management Systems (Volatility, Types of Margins & SPAN)
12.2.1 NSCCL—SPAN
12.2.2 Types of Margins

12.3 Margining System
12.3.1 SPAN Approach of Computing Initial Margins
12.3.2 Mechanics of SPAN
12.3.3 Overall Portfolio Margin Requirement

12.3.4 Cross Margining
12.4 Adjustments for Corporate Actions
12.5 Summary
12.6 Keywords
12.7 Review Questions

12.8 Further Readings

Objectives

After studying this unit, you should be able to:
 Discuss the risks associated with derivative activities;

 Explain the risk management systems (volatility, types of margins & span);
 Identify the features of risk containment mechanism on the F&O segment;
 Describe the margining system.

Introduction

In the previous unit, you have studied about the entities in clearing and settlement activities in
the F&O segment and settlement mechanism, clearing mechanism essentially involves working
out open positions and obligations of clearing members. We also discussed about the settlement
of futures contracts & options contracts and special facility for settlement of institutional deals.
This unit will help you to understand the risks associated with derivative activities. We will also
learn about the risk management systems and features of risk containment mechanism on the
F&O segment. The various sections and sub section of this unit will also explain objective of
NSCCL-SPAN, types of margins, SPAN approach of computing initial margins, mechanics of
SPAN and adjustments for corporate actions. Further, we will end up the unit with discussion
with margining system. To make the learning easier, we will take the help of globally recognised
best practices.

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