Overview
The BIT Portfolio Margin (‘PM’) tool evaluates the risk of a portfolio by calculating the most likely loss that could occur to a portfolio based on a series of hypothetical market scenarios and a number of parameters set by the risk management team. Compared to the regular margin methodology, which aggregates margin on the individual contract level, the PM methodology tends to reward hedgers by offering a greater margin benefit to their well maintained low risk portfolios. For speculators who have directional portfolios, however, lower margin is not always guaranteed with the PM enabled.
The calculated PM requirement allows for effective risk coverage whilst preserving capital efficiency. The final output of the margin model is used to directly collateralise margin requirements to help insure the positions of the members.
The new USDT PM upgrade will include USDT perpetuals and options with all currency pairs under USDT margin account. The required USDT initial margin will be aggregated by each currency pairs under PM methodology.
How to calculate PM for USDT option and perpetuals?
The margin components for PM are scenario PnL and floor margin. Scenario PnL represents the core risk analysis of the PM model by simulating the portfolio’s hypothetical profit and loss under a specific set of market conditions. The BIT PM model consists of 33 scenarios which include underlying price up/ down movements and option up/ down volatility (see below).
In order to ensure minimum risk coverage for all possible combinations of instruments, the floor margin is set for both outright and options, which, to some extent, will help reduce the margin procyclicality for low risk portfolios.
An example:
Portfolio (underlying BTCUSDT):
- Long 0.5 BTCUSDT Perpetual (Price 19040 USDT/ BTC)
- Short 1 BTCUSDT 20221028 19000 Call option (IV= 65%)
Scenario PnL component
Risk parameters:
Price range up 17%
Price range down 17%
30 day vol Volatility range up 0.35
30 day vol Volatility range down 0.25
Out of the 33 scenarios, underlying up 17% and standard 30d volatility up +0.35① generated the worst loss (approx. 1270 USDT) for the above delta hedged portfolio on 11th Oct 2022 at 12:00 GMT+8.
Floor margin component
Risk parameters:
Outright floor margin - 0.50%
Option floor margin - 0.01 BTC
PM Initial margin ratio - 1.25
Outright floor margin total = Outright floor margin * Σ|Outright position|*Perpetual Mark Price = 0.005 * 0.5*19040 = 47.6 USDT
To calculate Option floor margin total, we
1. firstly calculate the Discounting factor (DF②) which aims to apply a higher discount to the charge of the options with strikes closer to the underlying, the discounted charge for each single option would be
Option floor margin (i) = DF(i) * QTY(i) * 0.01 BTC * Underlying Price;
2. For all options per expiry, we group the instruments into two buckets:
1）Strike price>Underlying price
2）Strike price<=Underlying price;
3. Within the same bucket, we net sum the Option floor margin, and aggregate the charges from all buckets if occurred
Option floor margin Total=(|min{Σ[QTY(i) (bucket1))*DF(i)],0}| + |min{Σ[QTY(i) (bucket2))*DF(i)],0} |)* Option floor margin* Underlying Price
Given the underlying price is 19040, Option floor margin Total = |-1 * 0.02 |* 0.01*19040 = 3.8 USDT
To sum up:
Portfolio Maintenance margin Total = Scenario PnL component + Floor margin component = 1322.22 USDT
PM Initial margin Total = PM Maintenance margin Total * 1.25 = 1652.775 USDT
About the risk parameters
BIT employs a non-parametric approach as the main risk model to calculate the parameters. In order to ensure an overall conservative margin estimate, the risk team also employs a parametric approach for validation. Below demonstrates an overview of the BIT risk model.
The parameters will be calibrated periodically at the discretion of the BIT risk management team. And the model performance will be dynamically monitored on the instrument and portfolio level by the back-testing.
Default Management
Once your account MM is breaching the total equity level, the auto-liquidation (default) procedure will kick off by adjusting your Perpetual positions as the first step, aiming to reduce the overall risk of the defaulter’s portfolio. Note that during the period of default, it is at the discretion of the exchange in terms of the further steps of positions handling.
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① Vol up change of the contract= (30/days to expiry) ^ 0.3 * vol up change =(30/18) ^ 0.3 * 0.35
② DF(i) =min[ |K(i) - Price_Underlying)|/ (x* Price_Underlying),1]; x is currently set to be 10%