FX OPTION
EQUITY &
MARGIN
Trading FX options with GFT introduces some important considerations for the measures of Total/Available Equity and Margin. Unlike other forms of spot forex and CFD trades that normally have a margin requirement
associated with each individual position, GFT calculates margin differently when you trade FX options. When you sell an FX option, any position-based forex and FX option positions are combined and the margin is calculated on the overall spot forex portfolio. CFD positions will continue to have a separate margin for each position. There are three scenarios to consider:
When you open an FX option position, your Total Equity is calculated as the lesser of:
Cash + Floating P/L
Cash – Premium for Long FX Options
This helps prevent negative equity situations which could arise if the Floating P/L was available to purchase forex options. It also means the Margin Required (Margin Req.) is zero when the account has only long FX option positions.
PORTFOLIO POSITIONS
MARGIN REQUIRED
Only long FX options None, premium is fully collateralized
Long FX options + position-based forex positions Standard position-based forex margin required Any combination including short FX options FX Option Portfolio Margin
GFT FX Options 2
LONG FX OPTIONS
LONG FX OPTIONS + POSITION-BASED FX POSITIONS
Below is an account with a long FX option position entered at a price of $1,500:Continuing with the example above, a position-based forex position is now added:
Note: Margin Req = 0 and the FX
option premium was fully collateralized by deducting the Premium Price from Total Equity.
TOTAL EQUITY = 298,182.35
Which is the lesser of:
Cash + Floating P/L =
299,682.35 + 73.00 = 299,755.35 Cash - Premium for Long FX Options = 299,682.35 - 1,500.00 = 298,182.35
TOTAL EQUITY = 298,182.35
Which is the lesser of:
Cash + Floating P/L =
299,682.35 + 54.40 = 299,736.75 Cash - Premium for Long FX Options = 299,682.35 - 1,500.00 = 298,182.35
Margin Req = Position-Based Forex Margin = 1% * 100,000 = 1,000.00
Available Equity = Total Equity - Margin Req = 298,182.35 – 1,000.00 = 297,182.35
Forex trading involves high risks, with the potential for substantial losses and is not suitable for all persons. The high degree of margin can work against you as well as for you. Past performance is not necessarily indicative of future results.
PORTFOLIOS THAT INCLUDE SHORT FX OPTIONS
FX OPTION PORTFOLIO MARGIN
In addition to the two positions above, a short FX option position is added:
Stated simply, GFT’s FX Option Portfolio Margin is a risk-based margin system. The risk measures are Delta (a measure of directional risk) and Vega (a measure of volatility risk). In equation form:
FXO Portfolio Margin = Delta Margin + Vega Margin
Where:
• Delta Margin = Absolute Value (Spot Forex Margin % × Greater of the Long Delta Positions or the Short Delta Positions)
• Vega Margin = Absolute Value (Vega of Short FX Options × Vega Multiplier)
• Spot Forex Margin % is the margin percentage applied to position-based spot forex positions. The standard margin rate percentage on position-based spot forex is 1% (100:1 leverage)
TOTAL EQUITY = 298,182.35
Which is the lesser of:
Cash + Floating P/L =
299,682.35 + 32.40 = 299,714.75
Cash - Premium for Long FX Options = 299,682.35 - 1,500.00 = 298,182.35
Margin Required = FX Option Portfolio Margin = 461.24USD Available Equity = 298,182.35 – 461.24 = 297,721.10USD
Available Equity (AE) in this example is actually higher and the margin required is lower than in the previous example, even though more positions are open. This is due to the risk-reducing effect the short FX option position had on the overall spot forex portfolio. Not all trades will increase AE and decrease margin required, but the next section covers the dynamics at work that lead to this situation.
GFT FX Options 4 Vega Multiplier is the multiple assigned to each short FX option Vega position, according to the number of days until the FX option expires. See below:
For the USD/JPY positions above, FX Option Portfolio Margin is calculated as follows:
USD Delta = -11,109
-11,109 × 80.7575 × -1 = 897,135 (USD Delta × Spot Midpoint × -1 = JPY Delta)
The JPY Delta exposure is converted to the account base currency (in this case, it’s USD):
897,135 × 0.0124 = 11,124 (897,135 × USD conversion)
The greater delta position in account base terms is the long deltas from JPY. The margin percentage on the account is 1%, so the Delta component of the margin is:
Delta Margin = 11,124 × 1% = 111.24 USD
The Vega exposure on the short FX option is 175 USD. It expires in 74 days, so the Vega Multiplier associated with that position is two:
Vega Margin = 175 USD × 2 = 350 USD
FX Option Portfolio Margin = Delta Margin + Vega Margin = 111.24 USD + 350.00 USD = 461.24 USD
Before there was a short FX option position, the margin required was the standard position-based spot forex margin. Once a short FX option position was added to the portfolio, the FX Option Portfolio Margin was triggered. The margin required with the FX options included was lower than the margin required on just the position-based spot forex position because the JPY Delta exposure of the FX options offset the JPY Delta exposure of the position-based spot forex position. Even with a Vega margin of 350 USD, the overall margin required is lower because the Delta exposure is much less when the FX options are considered.
*GFT calculates margin required to more decimal places than displayed, which can result in a negligible
rounding difference, typically less than 0.02 of the account base currency
DAYS UNTIL
EXPIRATION:
VEGA MULTIPLIER
< 30 Days 3x Total Short Vega 31-90 Days 2x Total Short Vega > 91 Days 1x Total Short VegaOTHER FX OPTION NOTES
Cash does not change until an FX option position is closed. While the FX option position is open, the premiums are tracked as a balance in the first currency of the pair. When the position is closed or expires, a cash debit for the purchase and cash credit for the sale of the FX option will post to the account.
Delta and Vega are dynamic measures and the margin required in order to maintain open positions can change over time.
Due to the offsetting possibilities with FX options portfolio margin, some positions may not be eligible to be closed until other positions are closed or reduced.
