JSE Exotic Can-Do Options: Determining Initial Margins

18 Pages Posted: 23 Apr 2013

See all articles by Antonie Kotze

Antonie Kotze

Financial Chaos Theory; Department of Finance and Investment Management

Rudolf Oosthuizen

JSE Securities Exchange

Date Written: April 22, 2013

Abstract

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

Kotze, Antonie and Oosthuizen, Rudolf, JSE Exotic Can-Do Options: Determining Initial Margins (April 22, 2013). Available at SSRN: https://ssrn.com/abstract=2254975 or http://dx.doi.org/10.2139/ssrn.2254975

Antonie Kotze (Contact Author)

Financial Chaos Theory ( email )

PO Box 16185
Doornfontein, 2028
South Africa

HOME PAGE: http://www.quantonline.co.za/

Department of Finance and Investment Management ( email )

PO Box 524
Auckland Park
Johannesburg, Gauteng 2006
South Africa

HOME PAGE: http://www.uj.ac.za

Rudolf Oosthuizen

JSE Securities Exchange ( email )

United States

HOME PAGE: http://www.jse.co.za

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