Page 196 - DCOM510_FINANCIAL_DERIVATIVES

Unit 12: Risk Management of Financial Derivatives

12.3.4 Cross Margining Notes
Cross margining benefit is provided for off-setting positions at an individual client level in
equity and equity derivatives segment. The cross margin benefit is provided on following
offsetting positions:
(a) Index Futures and constituent Stock Futures positions in F&O segment

(b) Index futures position in F&O segment and constituent stock positions in CM segment
(c) Stock futures position in F&O segment and stock positions in CM segment
1. In order to extend the cross margining benefit as per (a) and (b) above, the basket of
constituent stock futures/stock positions needs to be a complete replica of the index
futures.
2. The positions in F&O segment for stock futures and index futures of the same expiry
month are eligible for cross margining benefit.
3. The position in a security is considered only once for providing cross margining benefit.
E.g. Positions in Stock Futures of security A used to set-off against index futures positions
is not considered again if there is an off-setting position in the security A in Cash segment.
4. Positions in option contracts are not considered for cross margining benefit. The positions
which are eligible for offset are subjected to spread margins. The spread margins shall be
25% of the applicable upfront margins on the offsetting positions.

Prior to the implementation of a cross margining mechanism positions in the equity and equity
derivatives segment were been treated separately, despite being traded on the common
underlying securities in both the segments.

Example: Mr. X bought 100 shares of a security A in the capital market segment and sold
100 shares of the same security in single stock futures of the F&O segment. Margins were
payable in the capital market and F&O segments separately. If the margins payable in the capital
market segment is ` 100 and in the F&O segment is ` 140, the total margin payable by MR. X is
` 240. The risk arising out of the open position of Mr. X in the capital market segment is
significantly mitigated by the corresponding off-setting position in the F&O segment. Cross
margining mechanism reduces the margin for Mr. X from ` 240 to only ` 60.

Self Assessment

Fill in the blanks:
8. The objective of SPAN is to identify ………………… in a portfolio of futures and options
contracts for each member.

9. The scenario contract values are updated at least ………………… times in the day.
10. The SPAN ………………… represents how a specific derivative instrument will gain or
lose value, from the current point in time to a specific point in time in the near future.

11. The specific set of market conditions evaluated by SPAN are called the …………………
12. A ………………… is a position in an underlying with one maturity which is hedged by an
offsetting position in the same underlying with a different maturity.

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