Hi, span stands for standardized portfolio analysis of risk.

Hi, span stands for standardized portfolio analysis of risk. It is a methodology developed by the Chicago mercantile exchange that is CME. The main objective of developing span was to identify the largest possibility of loss that any portfolio is likely to suffer. It is used by most exchanges around the world. Span is a software based on algorithms, the algorithm examines and assesses the entire portfolio account of a trader in order to find out the one-day risk for that particular account. Based on this analysis a margin is determined and it is named as the span margin.

Span margin is the initial margin required by the exchange in the futures and option segment, its objective is to identify overall risk in a portfolio of futures and options contracts. For every member the span margin of a particular security keeps changing from time to time based on the risk and volatility of the underlying asset. Higher the volatility of the underlying asset higher the span margins. The span margin is collected at the time of initiating the futures position. Most of the leading brokerage houses have a span calculator on their terminals. As shown on the screen you can calculate span margin by using the span margin calculator. By following these steps first choose the product you want to calculate the margin of it, can be a nifty futures or options contract. After that you have to choose the ticker symbol of the company you want to trade, so suppose you choose to trade in nifty futures now you have to select the lot size which you want to buy or sell.

Suppose you chose two lots of nifty futures which means 150 shares as one lot of nifty is worth 75 shares, tick the buy or sell option when you enter all the information you will be provided with the amount of margin which you will have to keep in your account. So for two lots of nifty you have to pay Rs 1,88,764 as span margin. In addition to span margin an additional margin over and above is also collected which is known as an exposure margin which is Rs 57,808. This margin is collected in order to protect a broker\\\\\\\’s liability.

So, exposure margin is the margin charged over and above the span to cushion for any losses. It is calculated on the value of the exposure taken at the time of initiating a futures trade. The trader has to adhere to the initial margin requirement. The entire initial margin that is span plus exposure is blocked in the trading account. To maintain a level of safety which here turns out to be Rs 2,46,572 for two lots of nifty futures. This ensures and protects the brokers in case of any adversity during trading hours.

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