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June 21, 2013

Close Out Risk Evaluation (CORE) | 20 – 70% Better Than VaR

Bovespa in Brasil have developed an approach to calculating margin which considers portfolio hedges and the timing of close-out to produce a model which more easily integrates multiple assets classes in clearing.

Seven test portfolios were provided to Finance Concepts, ranging from simple stock portfolios to digital options, Avellaneda said, and Core reduced the required margin by between 20% and 70% relative to a straightforward value-at-risk model. "Using this technique should improve margin requirements in CCP clearing," he said.

The method is subject to a US patent application, this would create a fourth or fifth distinct approach to margin:

  • SPAN
  • VaR (5 year, 5 day, 99%)
  • SwapClear VaR (10 year, 5 day, ES)
  • Eurex "Prisma" cross-product
  • Bovespa Core

Plenty of work for regulators to try and figure which are "equivalent" for out of region qualification. More at Risk (subs): Quant Congress Europe: BM&F Bovespa uses close-out model to cut margin – Risk.net.


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