| Asia Etrader | 1 Mar, 2008 Volume 2, Issue 3 |
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The Electronic Trading Resource for Asia - Are you Connected? |
A Look At SPANStandardized Portfolio Analysis of Risk (SPAN) was developed in 1988 by the Chicago Mercantile Exchange to enhance the margin efficiency of futures and options on futures in the same portfolio. SPAN calculates the likely loss of each position with 16 scenarios of volatility and price change to determine margin across the total portfolio arriving at a one-day risk (or worst-case scenario) for a trader's account. The key strength of SPAN is that it takes into account the entire portfolio and not just the last trade when establishing margin requirements. It has been widely adopted at many other exchanges including those in Asia (See list of SPAN exchanges in Asia). First of all margin in the futures market is not the same as margin for buying stocks. Futures margin is a performance bond that earns interest in your account while stock margin is money you borrow from your broker to pay for a stock (you pay interest for the loan to your broker). When you buy options outright you really only have to put up the premium to carry the position and no further margin is required. SPAN margining really focuses on the option writing and permits different futures and options months to offset one another. |
SPAN uses a standard option pricing model to determine how a contract will perform over the 16 previously mentioned scenarios. Option pricing models typically require five inputs:
Please see A Look at SPAN on page 5 |
Etrading InsiderHow Malaysia Leads Asia in Islamic Banking Financial Insights wrote this article taking a look at Malaysia is leading the way in Islamic banking. Islamic banking and finance (IBF) has been growing rapidly over the past few years. Though estimates vary, there is little dispute that annual global growth is consistently in the double digits and that Islamic finance assets under management are currently valued at more than US$400bn. Understanding the Principles of Islamic Banking The principles of IBF are embedded in the overall Islamic value system and governed by Islamic (Shariah) law. These principles have the following effects on IBF: |
* Application of interest rates prohibited: The concept of socioeconomic justice in Shariah law states that interest rates cannot be applied in loan situations; however, a rate of return is allowed in sale conditions.
Please see Etrading Insider on page 4 |
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Etrading Events MarchFunds World China 2008 Risk Minds Asia FPL India Electronic Trading Conference Islamic Funds Asia 2008 Is there an event we should know about? Contact support@asiaetrading.com to let us know. Future Asia etrading events can be found here .
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In The ZoneOn 3 Ferbuary Zhang Yujun, general manager of the Shenzhen Stock Exchange, met with the visiting president of the SGX, Xie Fuhua. Both parties conducted in-depth exchanges on personnel training, information interchange, product development, business and technical cooperation and signed the intent of cooperation in information interchange. The two exchanges agreed on establishing a joint work force to materialize specific cooperation issues and facilitate the process. Mizuho Securities Co has signed a business tie-up deal with Tata Capital Ltd, a member of India's largest conglomerate. Mizuho Securities and Tata Capital will jointly set up funds to invest in promising Indian companies and launch wealth management services for rich people in the South Asian country. GL TRADE, global provider of integrated multi assets and multi markets software solutions to international financial institutions, announces the seventh financial company to sign GL CLEARVISION, its middle office solution for clearing listed derivatives on the Singapore Stock Exchange (SGX). |
On 13 February Euroclear SA/NV and Central Depository Services (India) Limited (CDSL) have announced the signing of a Memorandum of Understanding (MoU) establishing a basis of cooperation in anticipation of developing a closer working relationship in the future. They also signed an MoU with National Securities Depository Limited (NSDL)also based in India. ICAP announced 28 February that it is launching non-deliverable forwards on seven Asian currencies and the Russian rouble on its electronic foreign exchange trading platform EBS on 3 March , further expanding its FX product offering. The Asian non-deliverable forwards (NDFs) are in Chinese renminbi (CNY), Korean won (KRW), Indian rupee (INR), Indonesian rupiah (IDR), Malaysian ringgit (MYR), Philippine peso (PHP) and Taiwan dollar (TWD) and are of one month duration. Broadridge Financial Solutions, Inc. has announced today that Mizuho Securities Asia Ltd. (Mizuho), has commenced live operations on the Broadridge CCASS (Central Clearing and Settlement System) Adapter in Hong Kong. Mizuho is using Broadridge's adapter to support the settlement of its domestic equities business in Hong Kong. |
The Multi Commodity Exchange (MCX), India’s commodity exchange, launched futures trading in Carbon Credits on 21 January 2008. OMX and Singapore Exchange Limited (SGX) announced 22 February that SGX will launch an upgrade to its market data system, SGX DerivativesQuote, on 27 February 2008. This solution is the first in the world to be powered by OMX's next generation distribution system for market data, Genium® Market Info. India Energy Exchange's (IEX) exchange trading system from OMX is on target for launch in Q2. IEX, that
aims to start a countrywide market for trading in electricity, will use OMX The merger of Surabaya Stock Exchange into Jakarta Stock Exchange to become the Indonesia Stock Exchange (IDX) last December 2007 saw it's market capitalization grow to Rp 2,538 trillion of which Rp 1,982 trillion represented equities, Rp 79.065 trillion came from Corporate Bonds, and Rp 477 trillion were from the State Debenture (SUN) the exchange announced February 19. |
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Etrading Insider from page 1 * Investment limitations: Islamic banks are prohibited from investing in certain industries and face limitations in using certain types of financial products that conflict with Islamic principles. Islamic financial institutions are available in several forms: * Islamic windows: Islamic financial service and product outlets available within conventional financial institutions.
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Malaysia has established itself as a regional, if not global, hub of Islamic finance through its encouragement of dual banking systems. The country's pioneering efforts led to the development of many innovative products and also inspired other Islamic markets that have followed the Malaysian example. One of the main reasons Malaysia has been able to take the lead in IBF is that the country maintains a liberal attitude toward IBF practices while remaining grounded in accepted IBF regulatory practices. As part of its Financial Sector Masterplan, the Malaysian central bank, Bank Negara Malaysia (BNM), has set a target to have Islamic banking assets equal 20% of total banking assets by 2010. One of the main reasons Malaysia has been able to establish itself as an Islamic finance hub is its high level of regulatory support in setting Islamic finance standards. Beginning with the introduction of the Islamic Banking Act in 1983, BNM has continued to implement policies that actively promote the growth of Islamic finance. Two examples of this are seen through the government's issue of non-interest-bearing paper as well as the founding of the Islamic interbank money market. |
The Malaysian government provides foreign banks with tax breaks on their Islamic operations and limits foreign ownership of local Islamic banks to 49%. However, there is an exception to this rule. Should the Islamic financial institution conduct foreign currency business, then foreign investors can own 100% of the institution. Islamic finance as a part of Malaysia's total financial industry has been steadily growing to ensure its place as a major player in the Malaysian market. The growth in Islamic banking, in particular, has been so high that the major Malaysian banks are looking to break out of their current Islamic windows operations and establish standalone subsidiaries with a greater scope of services, including investments and private banking. |
The Islamic banking industry is still establishing itself, but changes are occurring at a rapid rate. In the coming years one can expect: * Continued innovation in Islamic financial products: Newer and more innovative investment products such as bonds, derivatives, hedging and specialised investment vehicles can be expected. |
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| A Look at SPAN from page 1 |
In the pricing model the strike price is known and the risk-free rate isn't important. SPAN then takes the last three inputs, time, volatility and price of the underlying and performs the following 16 scenarios to arrive at a loss or gain value over each option and future. Scenario 1 Futures unchanged Up Volatility is decided by the Exchange and the price range covers the maintenance margin also set by the Exchange. Let’s take a look at how SPAN handles calls and puts in writing strategies. Let’s suppose you enter into a put credit spread on the Japan Government Bond future (JGB) with a delta of 0.10. The SPAN system will arrive at an initial margin requirement of say 20,000 Yen. Remember that SPAN assesses the total portfolio risk so if you add a call credit spread with an offsetting delta of -0.10 SPAN no further margin will be required. Without SPAN you would be required to post a margin for each position. As you can see this allows you to use less money to carry more positions and generate commissions for your broker. Another consideration of SPAN are deep out-of-the-money (OTM) options which could be more risky to the portfolio than the scanning range covers. SPAN arrives at a Short Option Minimum to mitigate this risk. Each contract is assigned a Short Option Minimum Charge by the Exchange. All short options, are totaled and multiplied by the appropriate short option charge resulting in the Short Option Minimum. |
The Short Option Minimum isn’t directly added to the portfolio risk but represents an absolute minimum or floor margin for the portfolio. The greater of the Short Option Minimum or the margin calculated under SPAN becomes the portfolio’s margin. SPAN also allows for increased margin for contracts in their last month before delivery. SPAN treats all contracts months the same so a December future will have the same margin requirement as a June future. Unfortunately, contracts don’t necessarily move by the same amount. SPAN adds Intermonth Spread Charge to account for this. SPAN also allows option contracts to be included in the Intermonth Spread Charge by creating a futures equivalent position from the options delta. Thus a more accurate Intermonth Spread Charge is realized. If you trade options understanding SPAN really isn’t that difficult and is rather intuitive. For further education on options trading visit Options University
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