gains and losses at the portfolio level. The largest loss recorded from this
process is used as the ‘scanning loss’ for the portfolio.
Inter-month spread charge
SPAN
®
assumes that price moves correlate perfectly across contract months.
However, since price moves across contract months rarely exhibit perfect
correlation, SPAN
®
adds an Inter-Month Spread Charge to the Scanning Loss
associated with each instrument. Effectively, this Inter-month Spread
Charge covers the inter-month basis risk that may exist for portfolios con-
taining futures and options with different expirations.
For each futures contract or other underlying instrument in which the port-
folio has positions, SPAN
®
identifies the net delta associated with it. SPAN
®
then creates spreads using these net deltas. As these spreads are created,
SPAN
®
keeps track of each tier (a set of consecutive futures contracts) of how
much delta has been consumed by spreading the tier, and how much
remains. For each spread formed, SPAN
®
assesses a charge per spread, the
total of all these charges for a particular commodity constitutes the inter-
month spread charge for that commodity.
Strategy spreads
A new feature of London SPAN
®
version 4 is its ‘Strategy Spread functional-
ity’. Here, consecutive Butterfly and Condor strategies with in a portfolio are
identified and processed at an appropriate rate, reflecting their lower risk
profile before the calculation of the inter-month spread charge. As such,
portfolios containing these strategies under London SPAN
®
version 4 will
benefit from the more accurate assessment of their risk.
These strategies are automatically identified by London SPAN
®
version 4
even if these positions were not created as a strategy.
Inter-commodity credits
Price movements tend to correlate fairly well between related underlying
instruments. As a result, gains from positions in one derivatives instrument
will sometimes offset losses in another related instrument. Therefore to
recognise the risk reducing aspects of portfolios that contain positions in
related derivative instruments, SPAN
®
will form inter-commodity spreads for
these positions. These spreads produce credits that in the final calculation of
the initial margin, may reduce that margin.
Each spread formed by SPAN
®
generates a percentage saving from the
total initial margin requirement for the underlying instrument. SPAN
®
applies these percentages to the outright initial margin requirements and in
most cases derives a lower initial margin requirement for the specific instru-
ment. SPAN
®
uses delta information to generate spreads, and the more of a
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