Vega Margin

Calculation of the Vega Margin

The Vega of a Forex Option position describes how the value of the Forex Option position changes as a result of changes in the implied volatility of the underlying Forex cross.

The calculation for the Vega Margin component of a Forex Option position is:

VEGA MARGIN = NOTIONAL AMOUNT * VEGA * IMPLIED VOLATILITY * VOLATILITY FACTOR

Volatility Factors are set per Currency Pair and Expiry Date tenor (see table below). Between these Expiry Date tenors the Volatility Factors are interpolated (see graph below). The Volatility Factors for short dated Expiry Dates are higher than those for long dated Expiry Dates because the volatility of a long-term Forex Option position is relatively less dynamic than a short-term Forex Option position.

When calculating the Vega Margin requirement for a Forex Option position, netting is performed across each Currency Pair for each Expiry Date. Thus, if a client has both bought and sold Forex Options in the same Currency Pair and for the same Expiry Date, the Vega Margin is calculated as the net of these positions. See the sample calculation for an example of this.

The Volatility Factors used in the Vega Margin calculation for major and minor currency pairs are shown below in tabular and graphical form. As noted above, Volatility Factors are interpolated between the expiry date tenors.

The next table shows the categorisation of currencies for Major Currency Pairs. With respect to these Volatility Factors, a Major Currency Pair is one which includes BOTH of any of the currencies listed.