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Counter-Cyclical Margins for Option Portfolios

32 Pages Posted: 30 Apr 2022 Publication Status: Published

See all articles by Yuanyuan Chen

Yuanyuan Chen

Nanjing University

Duan Li

City University of Hong Kong (CityU)

Qi Wu

City University of Hong Kong, School of Data Science

Abstract

We propose a counter-cyclical initial margin model for option portfolios. Our model explores the intrinsic netting within a given portfolio of European options and outputs a constant upper bound of the maximum possible loss. This feature would allow option clearinghouses and regulators to gauge the tightest margin levels that are stable. We compare our model with the scenario-based SPAN model and the sensitivitybased SIMM model in terms of the netting efficiency and the procyclical property. Using the SPX options and the interest rate swaptions as examples, we quantify the minimum amount of additional margins needed to make them fully counter-cyclical. We then show how to strike a balance between risk-sensitivity and counter-cyclicality if needed by mixing our model flexibly with a prevailing risk-sensitive margin model.

Keywords: option pricing, portfolio selection, portfolio constraints

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Suggested Citation

Chen, Yuanyuan and Li, Duan and Wu, Qi, Counter-Cyclical Margins for Option Portfolios. Available at SSRN: https://ssrn.com/abstract=4097611 or http://dx.doi.org/10.2139/ssrn.4097611

Yuanyuan Chen

Nanjing University ( email )

Duan Li

City University of Hong Kong (CityU)

Qi Wu (Contact Author)

City University of Hong Kong, School of Data Science ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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