JSE Exotic Can-Do Options: Determining Initial Margins
18 Pages Posted: 23 Apr 2013
Date Written: April 22, 2013
Can-do options are bespoke option structures listed on Safex and Yield-X. The JSE is the first exchange in the world to list, trade and clear exotic options. The first exotic was listed on 8 January 2007 with the onset of the financial crisis that played out during 2008. The option was on the FTSE/JSE Top 40 index and was a discrete look-back put spread with an averaging feature thrown in for spice. Since then, the types of exotics traded has grown in leaps and bounds, with many of them being complex in nature. Can-Dos are now also listed on Yield-X, with various currency pairs as underlyers. Every product listed on either Safex or Yield-X needs to be marked-to-market, and risk managed on a daily basis. Initial margins need to be estimated for these complex products. This note will describe and explain the methodologies currently used to price these exotic Can-Dos, as well as the methodologies currently in use to determine initial margins for these instruments.
Keywords: Option pricing, exotic options, Local volatility, initial margins, risk management, VaR, Value-at-Risk, binomial trees, trinomial trees
JEL Classification: G12, G13, G14, D81, C22, C15
Suggested Citation: Suggested Citation