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Margin Adequacy and Standards: An Analysis of the Crude Oil Futures Market

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  • Theodore E. Day

    (University of Texas at Dallas)

Abstract

This article proposes two value-based standards for setting the initial margin requirements on futures positions based on the observation that the distributions of the payoffs to futures traders and the potential losses to the futures clearinghouse can be described in terms of the payoffs to barrier options. Using both margin standards, we examine the adequacy of initial margin requirements in the crude oil futures market. Our results suggest that, on average, the initial margin requirements set by the New York Mercantile Exchange exceed the minimum margins required under our option-based standards for adequacy.

Suggested Citation

  • Theodore E. Day, 2004. "Margin Adequacy and Standards: An Analysis of the Crude Oil Futures Market," The Journal of Business, University of Chicago Press, vol. 77(1), pages 101-136, January.
    • Handle: RePEc:ucp:jnlbus:v:77:y:2004:i:1:p:101-136
    DOI: 10.1086/379863
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    Cited by:

    1. Robert A. Jones & Christophe Pérignon, 2013. "Derivatives Clearing, Default Risk, and Insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 80(2), pages 373-400, June.
    2. Cotter, John & Dowd, Kevin, 2006. "Spectral Risk Measures with an Application to Futures Clearinghouse Variation Margin Requirements," MPRA Paper 3495, University Library of Munich, Germany.
    3. Cruz Lopez, Jorge A. & Harris, Jeffrey H. & Hurlin, Christophe & Pérignon, Christophe, 2017. "CoMargin," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(5), pages 2183-2215, October.
      • Jorge A. Cruz Lopez & Jeffrey H. Harris & Christophe Hurlin & Christophe Pérignon, 2015. "CoMargin," Working Papers halshs-00979440, HAL.
      • Jorge Cruz Lopez & Jeffrey Harris & Christophe Hurlin & Christophe Pérignon, 2017. "CoMargin," Post-Print hal-03579309, HAL.
    4. Stan Miles, 2013. "Constant-collateral pyramiding trading strategies in futures markets," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 27(4), pages 381-396, December.
    5. Shi, Wei & Irwin, Scott H., 2006. "What Happens when Peter can't Pay Paul: Risk Management at Futures Exchange Clearinghouses," 2006 Annual meeting, July 23-26, Long Beach, CA 21087, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).

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