FX OPTION EQUITY & MARGIN

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1 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: PORTFOLIO POSITIONS Only long FX options Long FX options + position-based forex positions Any combination including short FX options MARGIN REQUIRED None, premium is fully collateralized Standard position-based forex margin required FX Option Portfolio Margin 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. The following are examples of the three scenarios along with a detailed example of how FX Option Portfolio Margin is calculated. GFT FX Options 1

2 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. LONG FX OPTIONS Below is an account with a long FX option position entered at a price of $1,500: 299, = 299, Note: Margin Req = 0 and the FX option premium was fully collateralized by deducting the Premium Price from Total Equity. LONG FX OPTIONS + POSITION-BASED FX POSITIONS Continuing with the example above, a position-based forex position is now added: 299, = 299, Margin Req = Position-Based Forex Margin = 1% * 100,000 = 1, Available Equity = Total Equity - Margin Req = 298, , = 297, GFT FX Options 2

3 PORTFOLIOS THAT INCLUDE SHORT FX OPTIONS In addition to the two positions above, a short FX option position is added: 299, = 299, Margin Required = FX Option Portfolio Margin = USD Available Equity = 298, = 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. FX OPTION PORTFOLIO MARGIN 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) Long Delta and Short Delta Positions are the exposures in each currency of the pair multiplied by the delta of the option. All Long Delta Positions are put in account base terms and added together. The same process is done for the Short Delta Positions. Vega of a short FX option is the exposure an FX option position has to a 1% change in volatility GFT FX Options 3

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: DAYS UNTIL EXPIRATION: VEGA MULTIPLIER < 30 Days 3x Total Short Vega Days 2x Total Short Vega > 91 Days 1x Total Short Vega *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 For the USD/JPY positions above, FX Option Portfolio Margin is calculated as follows: USD Delta = -11,109-11, = 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, = 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% = 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 = USD USD = 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 FX Options 4

5 OTHER 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. gftuk.com / / +44 (0) LIVE CHAT TOLL FREE UK MAIN Our services include products that are traded on margin and carry a risk that you can lose more than your initial deposit. The products may not be suitable for everyone - please ensure you fully understand the risks involved. GFT Markets is a trading name of GAIN Capital FOREX.com UK Limited and is authorised and regulated by the Financial Conduct Authority. FCA No