Page 193 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes values for each futures and options contract under the full set of risk scenarios constitutes the
risk array for that contract. In the risk array, losses are represented as positive values, and gains
as negative values.

!
Caution Risk array values are represented in Indian Rupees, the currency in which the
futures or options contract is denominated.
Risk Scenarios: The specific set of market conditions evaluated by SPAN, are called the risk
scenarios, and these are defined in terms of:

1. How much the price of the underlying instrument is expected to change over one trading
day, and
2. How much the volatility of that underlying price is expected to change over one trading
day.
SPAN further uses a standardised definition of the risk scenarios, defined in terms of:
1. The underlying price scan range or probable price change over a one day period, and
2. The underlying price volatility scan range or probable volatility change of the underlying
over a one day period.

Table 12.1 gives the sixteen risk scenarios. +1 refers to increase in volatility and -1 refers to
decrease in volatility.

Table 12.1: Worst Scenario Loss

Risk scenario number Price move in Volatility move Fraction of loss
multiples of price scan multiples of volatility considered (%)
rang range
1 0 + 1 100
2 0 – 1 100
3 + 1/3 + 1 100
4 + 1/3 – 1 100

5 – 1/3 + 1 100
6 – 1/3 – 1 100
7 + 2/3 + 1 100
8 + 2/3 – 1 100
9 – 2/3 + 1 100
10 – 2/3 – 1 100
11 + 1 + 1 100
12 + 1 – 1 100
13 – 1 + 1 100
14 – 1 – 1 100
15 + 2 0 35
16 – 2 0 35

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