Page 191 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes  Premium margin: In addition to initial margin, premium margin is charged at client level.
This margin is required to be paid by a buyer of an option till the premium settlement is
complete.
 Assignment margin: Assignment margin is levied in addition to initial margin and premium
margin. It is required to be paid on assigned positions of CMs towards exercise settlement
obligations for option contracts, till such obligations are fulfilled. The margin is charged
on the net exercise settlement value payable by a CM.



Caselet “Don’t Bet the Ranch!”

n April 1995, the Federal Reserve Bank of Boston hosted an educational forum for
users of derivatives, What Should You Be Asking About Derivatives? E. Gerald
ICorrigan, former president of the Federal Reserve Bank of New York, offered some
valuable, plain English words of advice to those in attendance.
When it comes to derivatives, they are words to live by:
 Don’t be shy about asking questions. That may seem very simple, but the fact of the
matter is that derivatives intimidate people.
 Don’t give a second thought to whether a question may or may not be stupid. It
doesn’t matter. Press. your own people. Press your dealer. If you can’t find the
answer to your question there, then talk to a regulator or lawyer. But ask questions
and ask questions aggressively.
 If you don’t understand how a particular transaction is valued, and if you cannot
satisfy yourself as to how to determine that value, just don’t do the transaction.
Those extra 2 basis points won’t make or break your life.

 If someone calls you on the phone and is trying to sell you a 10 percent piece of
paper in a 7 percent market, tell them they have the wrong number.
 Don’t bet the ranch on anything. None of us is smart enough to do that.

Source: www.bos.frb.org/education/pubs/toolsoft.pdf - United States
Self Assessment

State whether the following statements are true or false:
3. NSCCL charges an upfront initial margin for all the open positions of a CM.
4. The most critical component of risk containment mechanism for F & O segment is the
margining system and on-line position monitoring.
5. SPAN has the ability to estimate risk for combined futures and options portfolios, and
also re-value the same under various scenarios of changing market conditions.
6. NSCCL collects initial margin for all the open positions of a CM based on the margins
computed by NSE-SPAN.
7. Premium margin is levied in addition to initial margin and premium margin.

12.3 Margining System

NSCCL has developed a comprehensive risk containment mechanism for the Futures & Options
segment. The most critical component of a risk containment mechanism is the online position

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