Futures and options is a quite complicated segment in the stock market for new investors. On every contact brokerage firms charge a margin to the client, which includes Span and exposure margin. Do you know what is Span Margin and Exposure Margin? if not then we will discuss them in this article.
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What is Span Margin and Exposure Margin?
When an investor purchases or sells futures or options, their brokerage receives a fee known as Margin. The object of this margin on contracts is to protect against the threat of undesirable value fluctuations. The SPAN margin and the exposure margin are the two most common forms of margins.
Both Span and Exposure Margins are risk management methods. Exposure margins are blocked after the SPAN buffer for any possible damages.
whereas the SPAN margin is the minimal requisite blocked future and option writing positions in compliance with the exchanges policy.
What is Span Margin?
SPAN, or Standard Portfolio Analysis of Risk, is a strategy for calculating portfolio risk that gets its title from the technology utilized to estimate it (SPAN).
The SPAN margin, also known as a VaR margin in Indian stock markets, is the minimal margin needed to start a trade in the market.
For F&O approaches, it is estimated using a standardised method of portfolio risk analysis. Before placing an order, one can estimate their margin from different positions with the help of many tools.
The SPAN margin is generally used by F&O traders who currently have enough margin to cover any possible damages.
How to Span margins are calculated?
According to how the SPAN margin works, the system sets the margin for each position in a portfolio to account for the probability of the deadliest intraday movement.
This is accomplished by calculating a number of risk factors that are responsible for determining the possible benefits and losses for a contract in a variety of circumstances.
Instability, price fluctuations, and a shortened deadline are only a few of the above factors.
Basic rule for Span Margin
SPAN margins differ from one security to the next, based on the type of risk that must be assumed in conjunction with the security.
Since the probability of the portfolio being greater than the Index, the SPAN margin requirement for a specific share would be more than the expectation for an Index.
A basic rule of thumb is that the lower the fluctuations, the lesser the SPAN, and the stronger the volatility, the bigger the SPAN requirement.
Span Margin Fee
Companies have developed a number of calculator resources to assist you in calculating SPAN margin specifications, but the SPAN margin stays the same irrespective of whether the trade is intraday or overnight.
Since the risk factor is less, brokerage firms can opt to provide lower upfront fees as an incentive.
What is Exposure Margin?
The exposure margin is payable in addition to the SPAN margin and is normally conducted at the broker’s choice. It is also regarded as an extra margin, and it is obtained to cover a brokerage from liability that could occur as a result of volatile market fluctuations.
The SPAN margin is a preliminary estimate generated from determining the risk and uncertainty parameters, while the exposure margin, on the other side, is equivalent to an add-on margin cost that is based on the amount of exposure one receives.
Exposure margin Fee
The fundamental rule for estimating exposure margins for index future contracts is that the margin is restricted to 3% of the contract’s total value by Securities and Exchange Board of India (SEBI)
For instance, if the valuation of an NIFTY future contract is INR 2,000,000, the exposure margin is 3% of the amount, or INR 60,000.
Rule for Span and Exposure Margin
The customer must stick to the initial margin when initiating a futures trade. Simply, this is the consequence of combining the SPAN and exposure margins.
The exchanges block the entire margin until it has been verified. Both margins must be blocked for an overnight spot, according to new guidelines implemented in 2018. If you don’t follow these rules, you’ll face a penalty.
Writers of options and futures hold adequate margin in their accounts to offset any possible future loss. The SPAN margin and exposure margins are the two broad objects that writers use to keep this margin in control.
Initial Margin
The overall margin is calculated using the SPAN and exposure margins. The total of the SPAN and exposure margins is the overall margin.
While the SPAN margin varies depending on the future and options, the exposure margin is expected to stay relatively constant.
Conclusion
While some Brokers may be encouraged to reduce exposure margins as a methods of attracting new clients.
This is all from our side regarding What is Span Margin and Exposure Margin? Let us know your views in the comment section.
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FAQ
span margin full form
The full form of span margin is Standard Portfolio Analysis of Risk
what is span margin in hindi?
शेयर बाजार में व्यापार शुरू करने के लिए स्पैन मार्जिन न्यूनतम मार्जिन आवश्यकता है।
Formula of Initial margin?
Span Margin + Exposure Margins = Initial margin.
what is span margin?
Standard Portfolio Analysis of Risk margins taken by the brokerage firms are called span margin.
What is Exposure Margin?
The 'Exposure Margin' is the margin set aside beyond and above the SPAN to protect against MTM damages.
