NSE Quotes – Different types of Margins/Volatility

As you all know there are uncertainties in the movement of share prices. These uncertainties may arise from global economical, local political or economical conditions. When there are uncertainties there are risks associated with them. 

You need to pay some amount of money upfront to your broker to buy or short sell securities. This amount is called margin. You will need to pay the remaining amount on T+2 day. Margin payments ensure that each investor is serious about buying or selling shares. 

Let’s take an example. An investor buys 100 shares of Infosys at Rs2000 per share. The total amount is Rs 2L. Let’s say the investor paid a margin amount of Rs30,000 to buy those shares. If the share price falls by Rs500 on the next day, the notional loss for the investor will be 500 * 100 = Rs 50,000, which is greater than the margin amount paid. So there is a chance that the investor may not pay the remaining amount. The broker is at risk in this case as there is an obligation for him to pay that amount to stock exchange. Read more

July 13, 2008 | Filed Under Stocks | Leave a Comment 

NSE Quotes – Value at Risk (VaR)

This section needs a detailed explanation. VaR is computed using exponentially weighted moving average (EWMA) methodology. Based on statistical analysis, 94% weight is given to volatility on ‘T-1’ day and 6 % weight is given to T day return [Please read ‘NSE Quotes – Different types of Margins/Volatility’ for clear understanding of volatility].

T day return is computed as LN(Today’s Close Price/Yesterday’s Close price)

Take the volatility calculated on T-1 th day and apply the following formula to get T day’s volatility.

Square Root of [0.94 * T -1 day’s volatility * T -1 day’s volatility + 0.06 * T day’s return * T day’s return ]

Take an example to calculate VaR.

Share of XYZ Ltd

Volatility on July 1, 2008 = 0.0314

Closing price on June 30, 2008 = Rs. 360

Closing price on July 1, 2008 = Rs. 330 Read more

July 13, 2008 | Filed Under Stocks | Leave a Comment 

NSE Quotes – Extreme Loss Rate

Extreme Loss rate considers the losses that could occur outside the coverage of VaR.

The Extreme loss margin for a stock is the higher of the following

·        1.5 times the standard deviation of daily LN returns of the stock price in the last six months i.e. 1.5 times Volatilty in the last 6 months.

·        5% of the value of the position (Buy or Sell) 

Extreme Loss rate considers wider range of price values (6 months’ prices). The minimum value for this margin is 5% for any stock. 

This margin rate is fixed at the beginning of every month, by taking the price data on a rolling basis for the past six months.

July 13, 2008 | Filed Under Stocks | Leave a Comment 

Add to Technorati Favorites