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Suppose that I want to calculate what the margin requirements should be for a Bitcoin futures contract, where the contract is the USD/BTC exchange rate (settled in Bitcoins).

I've looked at the SPAN method and a paper on calculating margin. The SPAN model seems kinda complicated and I can't really wrap my head around it and I'm not sure if the model described in the paper is actually used in a real exchange.

I'm not sure how much of a stretch this would be, but could somebody demonstrate how the margin calculation would work for a Bitcoin futures contract? Or at least provide a some guidance on how to calculate the margin requirements.

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I can hardly wait for futures and other derivatives on an asset that itself changes hands at realized 100%+ (almost no matter over which timeframe) volatility. I guess with the end of the QE program phased in today we all need to start chasing other paper tigers. –  Matt Wolf Dec 19 '13 at 2:39

1 Answer 1

The reason the SPAN method looks complicated is that it is used for calculating the margin requirements for portfolios of options and futures, and therefore has to deal with changing volatilies as well as spot prices.

If you just want to calculate the margin requirement for futures, in principle it is much simpler, as you just need to worry about moves in the underlying.

On the other hand, it is difficult to come up with a sensible margin requirement for bitcoin, as the price fluctuations are so dramatic (and the typical size of fluctuations is probably time-varying to boot).

I would probably make an attempt as follows -

  1. Measure the daily volatility $\sigma$ of Bitcoin (I have no idea what this is, but given that Bitcoin can easily gain or lose 50% in a single day, I expect that it is quite high). For example, an annualized volatility of 200% would give an approximate daily volatility of 12.5%.

  2. Choose a multiple of the daily volatility to be your margin requirement. Maybe you should choose $4\sigma$, to take into account the extremely heavy tails, which would suggest a margin requirement of 50% of the portfolio value (almost not worth trading Bitcoin futures at all, in that case...)

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Given the volatility, I would think that it might make sense to allow overnight, weekly, and monthly contracts. In some of those case a 50% margin might not be so horrible. –  Lirik Dec 18 '13 at 19:06

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