Margins for Futures are computed using a statistical concept called VaR (Value at Risk) which essentially implies that margin collected should be large enough to cover the loss on the open position in 99% occasions. Greater the volatility of the stock/index, greater the risk
and therefore greater the margin.
Now when a stock/index rises, it usually does in an orderly fashion e.g. for Nifty to rise from 6825 to 12430 it took around 3 years and 11 months. In that period, volatility by and large came down or remained stable considering that in markets
Now when a stock/index rises, it usually does in an orderly fashion e.g. for Nifty to rise from 6825 to 12430 it took around 3 years and 11 months. In that period, volatility by and large came down or remained stable considering that in markets
majority of participants are bulls and bears (short sellers) form a small minority. So with falling volatility, margins remain stable thereby encouraging more people to enter into leveraged positions, in other words encourage speculation. But when Nifty falls from 12430 to 7510
in 10 weeks, volatility surges thus leading to substantial increase in stock/index margin and in general speculation gets discouraged by such an increase in margins.
So in simple words, speculation is cheap when markets are going up but expensive when markets start going down.
So in simple words, speculation is cheap when markets are going up but expensive when markets start going down.
If so, then where is the level playing field..when one pays a margin of say X while buying a stock at 52W High or ATH but pays a margin of 2x-4x while short selling a stock at 52W Low. Perhaps that explains why we have had more lower freezes compared to a solitary upper freeze
Has "Increase Margin" become a tool for bailing out bulls in a stock/index? What should be done to make markets a level playing field for bulls and bears alike so that one can expect genuine price discovery.
In 2008 David Einhorn and Aaron Brown debated VaR in Global Association of Risk Professionals Review, Einhorn compared VaR to "an airbag that works all the time, except when you have a car accident".
Fine lets accept VaR till we find a better alternative however we can do
Fine lets accept VaR till we find a better alternative however we can do
something about varying lot sizes of stock and fixing a definite domain for F&O segment say restrict it Nifty 200 index constituents only and /or fix a uniform lot size of 50/100 shares per contract irrespective of the price of the underlying
to provide some resemblance of a level playing to bulls and bears in the market.
Will changing the Monthly Derivative contract settlement day from "last thursday" to last trading day of the month help in some way?
Will changing the Monthly Derivative contract settlement day from "last thursday" to last trading day of the month help in some way?
