Span Margin Exposure

What is Span Margin?

In basic terms, Span Margin represents the minimum amount traders need to pay for Futures and Options (F&O) transactions, in accordance with stock exchange regulations. Derived from Standard Portfolio Analysis of Risk (SPAN), this method is employed by stock exchanges to assess risks and margins associated with F&O contracts. Utilizing factors such as the underlying asset's price and volatility, SPAN calculates the potential portfolio loss and establishes a suitable margin. The collection and monitoring of SPAN margin occur during order placement, with revisions made by stock exchanges throughout the day to reflect market dynamics.

What is Exposure Margin?

Exposure Margin serves as an extra layer of protection for stockbrokers against unforeseen risks, specifically At The Money (ATM) losses, in Futures and Options (F&O) trading. This supplementary margin is collected in addition to the span margin, aiming to offset adverse price movements during F&O transactions. By securing exposure margin before initiating a trade, stockbrokers shield themselves from potential liabilities arising from unpredictable market fluctuations. Adhering to SEBI guidelines, exposure margin is uniformly set for all securities and is capped at a maximum of 3% of the contract value. This regulatory measure ensures a standardized and limited exposure for market participants.

Total Initial Margin 

Total Initial Margin = Span Margin and Exposure Margin

Stock brokers collect an amount called ‘Initial Margin’, when a trader trades in Futures & Options (F&O) contracts. The main objective of collecting this margin is to mitigate the potential loss a trader may incur during adverse market movements.

Total Initial Margin is calculated by combining margin of two types of margins namely, Span margin and exposure margin. 

Total Initial Margin = Span Margin + Exposure Margin

How To Calculate Span and Exposure Margin?

How To Calculate Span Margin

The calculation of a contract's SPAN margin is facilitated by the Standardized Portfolio Analysis of Risk (SPAN) software, utilized in trading commodities, equities, and currencies for Futures and Options (F&O) strategies. Also known as Value at Risk (VaR), it represents the minimum margin essential to initiate a market trade. F&O traders primarily rely on the SPAN margin calculator.

These calculator tools adhere to The Standardized Portfolio Analysis of Risk (SPAN) system, a standardized framework implemented by numerous exchanges. Margin requirements are computed based on the one-day risk associated with a trader's account. The system assesses the potential maximum one-day loss under various market scenarios, with this maximum loss determining the margin requirement.

SPAN evaluates probable premium values in both upward and downward volatility scenarios at each price scan point. These values are then compared to the theoretical premium value, based on the underlying last closing value, to ascertain potential profit or loss.

By globally analyzing one-day risk for a trader's account, SPAN establishes margin requirements. The calculation involves sophisticated algorithms processing risk arrays and modeled risk scenarios.

How To Calculate Exposure Margin

The Exposure margin for index futures contracts is set at 3% of the contract's value. For instance, if the value of a NIFTY futures contract is Rs.10,00,000, the applicable Exposure margin for this contract would amount to 3%, totalling Rs.30,000.

In contrast, for Stocks, options, and other derivatives, the Exposure margin typically stands at 5% or 1.5 times the Standard Deviation, choosing the higher value between the two as the applicable margin.

Frequently Asked Questions

Describe Span Margin Meaning?

Span Margin is the minimum margin required for Futures and Options (F&O) trading, determined by the Standardized Portfolio Analysis of Risk (SPAN) system. It accounts for potential losses based on price volatility and is crucial for maintaining market stability by ensuring traders have sufficient funds to cover risks. Span Margin is calculated by evaluating various market scenarios and is a key aspect in risk management for F&O traders.

Describe Exposure Margin Meaning?

Exposure Margin is an additional margin collected by brokers to mitigate uncertain risks, such as At The Money (ATM) losses, in Futures and Options (F&O) trading. It acts as a safety cushion beyond the span margin, covering adverse price movements during trades and protecting brokers from unforeseen losses. According to SEBI guidelines, exposure margin is fixed for all securities and cannot exceed 3% of the contract value.

What Is Meant by Unlimited Exposure in MCX Commodity?

Unlimited exposure in MCX commodity trading refers to a scenario where the potential losses for a trader are not capped or limited. Unlike certain risk management mechanisms, such as stop-loss orders, unlimited exposure means there is no predetermined maximum loss that can occur. Traders need to be cautious as this lack of limitation on potential losses can lead to significant financial risks in volatile commodity markets on the Multi Commodity Exchange (MCX). It emphasizes the importance of robust risk management strategies to protect against unforeseen market fluctuations.

What Is Span Margin Full Form?

The full form of SPAN Margin is "Standard Portfolio Analysis of Risk Margin." It is a risk-based margin system used in Indian stock markets to calculate the minimum margin requirement for trading Futures and Options (F&O) contracts.

What Is Span Margin in Futures?

Span Margin in futures is the minimum amount required by traders to initiate a position, calculated by the Standard Portfolio Analysis of Risk (SPAN) system. It considers factors like price volatility and potential risks associated with the futures contract to ensure traders have sufficient funds to cover potential losses. Span Margin is essential for risk management in futures trading.