Forex Options Margin policy
The value of your investments can go down as well as up.
Losses can exceed deposits on margin products. Please ensure you understand the risks.
Vanilla Options Margin policy
While the exposure is rather straightforwardly given as the notional amount on an FX spot or forward position, this is not the case with FX options. You will not be able to just use the notional amount on a complicated option strategy.
On many types of option strategies (the ones with unlimited risk), the FX Expiry Margin (which is the FX Options margin model) uses the margin rate on the underlying currency pair to calculate the margin requirement. So which margin rate should now be used for the margin calculation of this particular currency pair, when we do not have a single fixed margin rate considering it now depends on the level of exposure? The answer to this question is the blended margin rate based on the highest potential exposure across your FX and FX option positions in the currency pair
The margin requirement on FX Options is calculated per currency pair, ensuring alignment with the concept of tiered margins, and per maturity date. There is a ceiling to the margin requirement that is the highest potential exposure across the FX Options and FX positions multiplied by the prevailing FX (spot) margin requirement. This calculation also takes into account potential netting between FX Options and FX spot and forward positions.
On limited risk strategies, e.g. a short call spread, the margin requirement on an FX Options portfolio is calculated as the maximum future loss.
Example 1: Short Call Spread or Limited Risk strategy
You sell a call spread on 10M USDCAD at strikes 1.41 and 1.42.
The current spot rate is 1.40.
The margin requirement will be the maximum future loss of 71,429 USD (10M x (1.42 – 1.41) = 100,000 CAD / USD @ 1.40).
On unlimited risk strategies, e.g. naked short options, the margin requirement is calculated as the notional amount multiplied by the prevailing spot margin requirement.
Example 2: Unlimited Downside Risk
You sell a 10M USDCAD put option. You have an unlimited downside risk. The margin requirement is therefore calculated as the notional amount multiplied by the prevailing spot margin requirement.
The prevailing spot margin rate is determined by the highest potential exposure, which is 10M USD.
Thus, the prevailing spot rate is the blended margin rate of 2.2% ((1% x 3M USD + 2% x 2M USD + 3% x 5M USD) / 10M).
The margin requirement is therefore 220,000 USD (2.2% x 10M USD).
Tiered margin rates are applicable to the FX Options margin calculation when your margin requirement is driven by the prevailing margin rate and not the maximum future loss. The prevailing spot margin levels are tiered based on USD notional amounts, the higher the notional amount potentially the higher the margin rate. The tiered margin requirement is calculated per currency pair. In the FX Options margin calculation, the prevailing spot margin requirement in each currency pair is the tiered or the blended margin rate determined on the basis of the highest potential exposure across the FX Options and FX positions.
An option is categorised as a red product as it is considered an investment product with a high complexity and a high risk.
You should be aware that in purchasing Foreign Exchange Options, your potential loss will be the amount of the premium paid for the option, plus any fees or transaction charges that are applicable, should the option not achieve its strike price on the expiry date
Certain options markets operate on a margined basis, under which buyers do not pay the full premium on their option at the time they purchase it. In this situation you may subsequently be called upon to pay margin on the option up to the level of your premium. If you fail to do so as required, your position may be closed or liquidated.
If you write an option, the risk involved is considerably higher than buying an option. You may be liable for margin to maintain your position and a loss may be sustained well in excess of the premium received.
By writing an option, you accept a legal obligation to purchase or sell the underlying asset if the option is exercised against you; however far the market price has moved away from the strike. If you already own the underlying asset that you have contracted to sell, your risk will be limited.
If you do not own the underlying asset the risk can be unlimited. Only experienced persons should contemplate writing uncovered options, then only after securing full detail of the applicable conditions and potential risk exposure.
Danish banks are required to categorise investment products offered to retail clients depending on the product’s complexity and risk as: green, yellow or red. For more information click here.