Forex Options (FXO) Margin Policy
With FX options the exposure is not given as the notional amount on a FX spot or forward position. Hence it will not be prudent to only use the notional amount on complicated options strategies.
On the option strategies 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. The margin calculation of a currency pair, without a single fixed margin rate will be based on the highest potential exposure across the FX position and the FX option positions in the currency pair.
FX Expiry Margin calculation
The margin requirement on FX Options is calculated per currency pair ensuring alignment with the concept of tiered margins and per maturity date. In each currency pair, there is an upper limit to the margin requirement that is the highest potential exposure across the FX Options and FX positions multiplied by the prevailing 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.
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.
Tiered margin rates are applicable to the FX Options margin calculation when the margin requirement is driven by the prevailing spot margin requirement – 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 margin rate determined on the basis of the highest potential exposure across the FX Options and FX positions.
For specific explanation and detailed FXO examples (Appendix II) please click here.
View FX Margin Policy