# How To Calculate Margin?

January 04, 2023

One of the most important concepts to grasp when trading futures and options are the concepts of a margin. Before you begin trading in F&O, you must deposit an initial margin with the broker. The goal is to safeguard the broker if the buyer or seller loses money when trading futures and options due to price volatility.

You may trade in multiples of
your starting margin. For example, if the margin is 10% and you wish to invest
₹10 Lakhs in futures and options, you must deposit ₹1 Lakh with the broker.
This multiple in which you trade is known as leverage.

Ø **Margin Calculator**

Before utilizing the F&O
margin calculator, it's essential to understand the many kinds of margins, such
as SPAN. To calculate margins, a SPAN margin calculator employs complicated
algorithms. The SPAN margin calculator calculates a starting margin equal to
the portfolio's maximum loss under various situations. SPAN margins are updated
six times per day therefore, the calculator's values may vary based on the time
of day.

**Ø
****Value At Risk Margin**

**The value-at-risk margin is
included in the NSE F&O margin calculator. It calculates the likelihood of
an asset losing value based on a statistical examination of previous volatility
and price patterns. Margins will differ depending on whether securities are
classified as Group I, Group II, or Group III. There is also an Index VaR for
each of the indexes.**

**Ø ****Extreme Loss Margin**

Then there's Extreme Loss
Margin (ELM), which is the larger of the two: 1.5 times or 5% the standard
deviation of the security's daily logarithmic returns over the previous six
months. It is computed at the end of each month using rolling data from the
previous six months. The outcome is valid for the next month.

**Ø ****How are SPAN Margins Paid?**

**SPAN margin is expressed as a
percentage of the total contract value. For example, if the contract value is
₹6,00,000 and the SPAN is 3%, the trader must pay ₹18,000. Before traders may
enter the market, SEBI requires brokers to obtain a margin. Failure to comply
with the new standards would result in a margin penalty.**

**Ø ****Who is Responsible for Collecting SPAN and Exposure Margin?**

To allow users to trade in
the futures and options markets, the broker receives both SPAN and exposure
margin upfront. The margin protects against the possibility of undesirable
price fluctuation.

SPAN, which stands for
Standard Portfolio Analysis of Risk, is the minimum margin required based on
the risk and volatility of the underlying. It gets its name from the tool used
to analyze it. In addition to the SPAN margin, the broker would get an exposure
margin, which serves as an extra cushion to safeguard the broker's obligation
against extreme price changes. The total margin is the product of the SPAN and
the exposure margin.

**Source**:
www.motilaloswal.com

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