Page 200 - DCOM510_FINANCIAL_DERIVATIVES

Unit 12: Risk Management of Financial Derivatives

 NSCCL has developed a comprehensive risk containment mechanism for the Futures & Notes
Options segment. The most critical component of a risk containment mechanism is the
online position monitoring and margining system.
 The basis for any adjustment for corporate action shall be such that the value of the
position of the market participants on cum and ex-date for corporate action shall continue
to remain the same as far as possible.
 Deep-out-of-the-money short options positions pose a special risk identification problem.
As they move towards expiration, they may not be significantly exposed to “normal”
price moves in the underlying.

 A calendar spread is a position in an underlying with one maturity which is hedged by an
offsetting position in the same underlying with a different maturity.
 Cross margining benefit is provided for offsetting positions at an individual client level
in equity and equity derivatives segment.
 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.

12.6 Keywords

 Assignment margin: Assignment margin is levied in addition to initial margin and premium
margin.
 Derivative: A security, like an Option or Future, whose value is derived from another
underlying security. Futures contracts, forward contracts, and options are among the most
common types of derivatives.
 Financial derivatives: Financial derivatives are broadly defined as instruments that
primarily derive their value from the performance of underlying interest or foreign
exchange rates, equity, or commodity prices.

 Premium margin: Premium margin is charged at client level.
 Risk: The chance of financial loss, or more formally, the variability of returns associated
with a given asset. The chance that actual outcomes may differ from those expected.

 Risk Array: The amount by which the futures and options contracts will gain or lose value
over the look-ahead time under that risk scenario
 Risk scenarios: The specific set of market conditions evaluated by SPAN, are called the
risk scenarios.
 SPAN risk parameter file: Risk arrays and other necessary data inputs for margin calculation
are provided to members daily in a file called the SPAN risk parameter file.
12.7 Review Questions

1. What is risk?
2. Write down the nine categories of risk for bank supervision purposes.
3. “Risks associated with derivatives are not new or exotic.” Discuss.
4. “NSCCL has developed a comprehensive risk containment mechanism for the F&O
segment.” Explain the statements with appropriate example.

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