Vega Margin

Expiry Date Buckets

The Vega margin is calculated based on the percentage change in the volatility of an option across different expiry dates. The purpose of the expiry date bucket is to differentiate between very short termed and very long termed options. This method recognizes the fact that the volatility associated with a long-term option (i.e. an option with a long time until expiry) is different from that associated with a short-term option. A long-term option is more stable than a short-term option, primarily due to smaller relative changes in volatility.

The expiry date buckets are defined as shown in the figure below.

Expiry Date Buckets

The Vega margin is calculated as follows:

The Vega is used to calculate the volatility exposure of each option position (the Vega of an FX spot position is 0).
The Vega exposure is netted for each currency pair and for each expiry date bucket. Hence, if a client has both bought and sold options in the same currency cross and within the same expiry date bucket, the Vega margin is calculated on the net Vega exposure of these positions.
The netted Vega exposures are multiplied by the volatility margin requirement factors defined for each expiry date bucket.
The 100% and -50% in the first expiry bucket (see graph above) illustrate that the Vega requirement is calculated based on a scenario where the volatility doubles/halves for an option with one week until expiry. The worst case scenario - e.g. for the buyer of an option the worst-case is that the option's volatility decreases by half - of these calculations is then used as the option's Vega margin requirement.
If the option does not cause the client's margin requirement to exceed $25,000, the option's Vega margin will only be half of what is mentioned below.

Expiry Date Buckets	One Week		1 Month
Position	Long Call/Put	Short Call/Put	Long Call/Put	Short Call/Put
change up	N/A	-5500	N/A	-6000
change down	-2750	N/A	-2400	N/A
Margin required	2750	5500	2400	6000
*Calculated for an option with 1 million notional amount and with a Vega of 5.5 and 12 for the 1W and 1M respectively

Note: The Vega and the Vega margin reported in the table above and in the example below are displayed in terms of the "Base Currency" (i.e. in EUR for a EUR/USD option). Thus, for a EUR/USD option, the Vega and the Vega margins listed above and below are in euros. The Vega of an option that the client possesses can be found by clicking on the trade in the 'Account Summary. Please note, however, that the Vega in the Account Summary is noted in the "Reference Currency" (i.e. in USD for a EUR/USD option). Hence, if an investor wants to find his/her Vega in the Base Currency he/she will have to divide the Vega buy the spot.

Example 1

A client sells a EUR/USD Call for 1 week with a notional amount of 1 million. Furthermore, assume that the Vega is 0.055 and the underlying asset has a volatility of 10%. Since the client is a seller of the option, the worst-case scenario for the client is when the volatility increases. Hence, the Vol Factor is found in the "Change up - 1 Week" expiry bucket which lists it as 100%. The Vega margin of the option is then calculated as 0.055 * 10% * 100% *1,000,000 EUR = 5500 EUR.

Example 2

A client buys a 1 month EUR/USD Put for one million EUR with a Vega of 0.12 and a volatility of 10%. In this case, the worst-case scenario is when the volatility decreases. Therefore, the Vol Factor is to be found in the "Change down - 1 Month" expiry bucket where it is listed as 20%. Using the same equation as above we get Vega margin = 0.12 * 10% * 20% * 1,000,000 EUR = 2400 EUR.