Chapter 23 - Client Margin Requirements (Done)

Question 1

What is loan value?

Answer 1

Amount that can be used as collateral
against money owing.

Question 2

What is a margin call?

Answer 2

Calculated as the margin requirement
less any cash or loan value in the
account; issued by a member firm to a
client to request additional margin to
bring the account on side; can be met
with a deposit of cash, fully-paid for
securities, or any combination thereof.

Question 3

What is margin requirement?

Answer 3

The amount of margin required for
specific positions or strategies or
combinations thereof.

Question 4

What is meant by marginable spread?

Answer 4

The amount of margin required for
specific positions or strategies or
combinations thereof.

Question 5

What is SPAN?

Answer 5

SPAN (Standard Portfolio ANalysis
of risk)
Risk-based margining system
developed in 1988 by the Chicago
Mercantile Exchange.

Question 6

What is STANS?

Answer 6

GLOSSARYG * 5© CANADIAN SECURITIES INSTITUTE
STANS (System for Theoretical
Analysis and Numerical Simulations)
Risk-based margining system used by
the OCC

Question 7

What margin is

Answer 7

• Margin represents a form of down payment for securities and written options.
• The level of margin a particular position is subject to is commensurate with the level of risk for the position.
• A purchased option must generally be paid for in full and is given no loan value.
• Covered written options have reduced margin requirements.
• Spreads have favourable margin requirements only if the long option expires at the same time as or after the
  short option.
• Member firms must ensure that their clients deposit at least the minimum margin required by the exchanges

Question 8

How margin requirements are calculated for various equity option positions and strategies

Answer 8

• A margin formula sheet will be provided with the exam. A copy of the formula sheet is downloadable from the
  online course portal.
• You will be required to know how to apply the formulas to various positions.

Question 9

How margin calls are calculated

Answer 9

• After an adverse price movement, margin calls may occur on margined option positions. Margin calls are
  calculated by subtracting an account current credit balance from the updated margin requirement.
• Margin calls may be met by any combination of cash and loan value from fully paid-for securities

Question 10

How client margin requirements may differ from capital required from member firms

Answer 10

• Capital requirements for firm and market maker accounts are typically less onerous than client requirements.
• The actual margin deposits made by member firms to the clearing corporation are based on a member firm’s
  overall risk as calculated using sophisticated computer systems such as SPAN and STANS.

Question 11

Define margin as it pertains to securities and options transactions.

Answer 11

For securities and option-writing transactions, margin is a form of downpayment.

Question 12

Assume that an investor makes the following transactions in an account with no other securities or money
balances. For each question, calculate the minimum margin requirement. Assume that the closing price for the
stock and options are the same as the prices given, and that the stock is eligible for reduced margin.
a. Buys 1,000 XYZ at $45 and writes 10 XYZ May 50 calls at $0.90.
Margin Requirement:
b. Buys 5 XYZ May 40 puts at $0.75. Assume XYZ is trading at $45.
Margin Requirement:
c. Writes 4 XYZ May 45 calls at $3.00 and writes 4 XYZ May 45 puts at $2.75. Assume XYZ is trading at $45.
Margin Requirement:
d. Buys 5 XYZ May 45 calls at $3.00 and writes 5 XYZ May 50 calls at $0.90.
Margin Requirement:
e. Buys 10 XYZ May 45 puts at $2.75 and writes 10 XYZ May 50 puts at $6.00. Assume XYZ is trading at $45.
Margin Requirement:
f. Buys 300 XYZ at $45 and buys 3 XYZ May 40 puts at $0.75.
Margin Requirement:
g. Sells short 900 XYZ at $45 and buys 9 XYZ May 50 calls at $0.90.
Margin Requirement:
h. Writes 4 XYZ May 50 calls at $0.90 and writes 4 XYZ May 40 puts at $0.75. Assume XYZ is trading at $45.
Margin Requirement:
i. Writes 9 XYZ May 50 calls at $0.90. Assume XYZ is trading at $45.
Margin Requirement:

Answer 12

a. Margin Requirement: The lesser of:
($45 × 1,000) − ($45 × 1,000 × 0.7) = $13,500; and
($50 × 1,000) − ($45 × 1,000 × 0.7) = $18,500
Margin requirement is $13,500
b. Margin Requirement: ($0.75 × 5 × 100) = $375
When an option is purchased it must be paid for in full. As the most that can be lost is the premium, no
additional margin is required. The margin requirement is then limited to the initial premium paid. No
additional money outside of the purchase price is required.
c. Margin Requirement: Use rule of thumb.
($3 × 4 × 100) + ($45 × 400 × 0.3) = $6,600
Margin requirement is $6,600
d. Margin Requirement: (5 × 100 × ($3 − $0.90)) = $1,050
e. Margin Requirement: Use the difference in exercise prices as this is lower than the
short put’s margin requirement.
10 × 100 × $5 = $5,000
Margin requirement is $5,000
f. Margin Requirement: The lesser of:
($45 × 300) − ($45 × 300 × 0.7) = $4,050; and
(($45 + $0.75) × 300) − ($40 × 300) = $1,725
Margin requirement is $1,725
g. Margin Requirement: ($0.90 × 9 × 100) = $810; plus
the lesser of:
($50 × 9 × 100) = $45,000; and
($45 × 900 × 1.3) = $52,650
Margin requirement is $45,810
h. Margin Requirement: The margin requirement on the short call (remember the rule
of thumb) is greater than the requirement on the short put.
($0.90 × 4 × 100) + ($45 × 400 × 0.3) − ($5 × 400) = $3,760
Margin requirement is $3,760
i. Margin Requirement: ($0.90 × 9 × 100) + ($45 × 900 × 0.3) − ($5 × 900) = $8,460
Margin requirement is $8,460