SPAN (Standard Portfolio Analysis of Risk) Calculation is a standardized methodology for computing margin requirements for portfolios of derivatives, particularly relevant for institutional crypto options and futures. Developed by the Chicago Mercantile Exchange (CME), it assesses the risk of a portfolio by simulating potential price and volatility changes across various market scenarios. Its purpose is to determine the minimum collateral necessary to cover potential losses with a high degree of confidence, promoting financial stability.
Mechanism
The mechanism involves defining a range of risk scenarios (e.g., price up/down, volatility up/down) for each underlying asset. For each scenario, the profit or loss for every instrument in the portfolio is calculated. The largest loss across all scenarios, combined with inter-commodity spread credits and other offsets, determines the overall portfolio margin requirement. This calculation is updated frequently, often in real-time, to reflect evolving market conditions and position changes.
Methodology
The methodology relies on a portfolio-based risk assessment, recognizing that different positions within a portfolio can offset each other’s risks. CCPs and clearing firms apply SPAN to calculate initial margin, requiring clearing members to post collateral covering this exposure. The system architecture supporting SPAN calculation demands high-performance computing to process vast amounts of market data and portfolio positions rapidly, ensuring accurate and timely margin calls in dynamic crypto derivatives markets.
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