Standard Portfolio Analysis of Risk (SPAN) is a widely adopted methodology for calculating margin requirements for portfolios containing futures and options contracts. This system analyzes the risk of an entire portfolio by simulating potential gains and losses across a range of predefined market scenarios. The SPAN calculation determines the minimum margin required to cover potential losses under these scenarios.
Methodology
The SPAN methodology calculates risk by evaluating the portfolio’s value change under various stress scenarios, including changes in price and volatility. It identifies the scenario that results in the largest loss for the portfolio, setting the margin requirement based on this worst-case outcome. This approach provides a comprehensive view of portfolio risk, accounting for offsets between different positions.
Portfolio
The application of SPAN allows for efficient capital utilization by recognizing risk offsets within a diversified portfolio. Instead of requiring full margin for each individual position, SPAN calculates a net margin requirement based on the overall risk profile. This enables traders to manage complex strategies with less capital, enhancing market liquidity and participation.
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