Being involved in the business of trading, risk and margin
lending technology means hearing crazy new financial jargon every
day. At least it keeps our job at PAC-INVEST a bit interesting.
I have been working on a technology project for a client
recently, involving several margin lending and risk management
concepts. After a bit of head bashing and a bit of burning of the
proverbial midnight oil, I can finally say 'I get it'.
My short little jargon buster goes like this:
Loan Balance: The amount of money you can
borrow from the bank. This is a static value once your loan is
Security Value: The amount of money all your
securities are worth on the market. This is a dynamic value and
depends on the market price of those securities.
Buffer: The buffer is also a dynamic value
depending on the security value, set by the Bank.
Total Security Value: Security Value plus
Shortfall: the difference between the Loan
Balance and the Total Security Value.
Margin Call Amount: The difference between Loan
Balance and Security Value.
The arithmetical relationship follows:
Loan Balance = Shortfall + Total Security
Total Security Value = Security Value +
Shortfall = Loan Balance - Total Security Value = Margin
Call Amount - Buffer
Margin Call Amount = Loan Balance - Security Value =
Shortfall + Buffer
Following sections illustrate the concepts of the Margin Call
and the Buffer Alert and also prove the old adage that a picture is
worth a few thousand words (fine, call me lazy).
The Margin Call is defined as Shortfall > 0.
We can see from the below diagram that the security value of this
account is less than the loan balance at the moment. What makes it
worse is that even though it is greater than 'plus the buffer' (the
total security value), it is still less than the loan balance. This
results in the Shortfall = Loan Balance - Total Security
Value is greater than 0. So this account is under Margin
Note: the Shortfall here is a positive value.
The Buffer Alert is defined as Margin Call
Amount > Total Buffer Value * 0.5 AND Margin Call Amount <
Total Buffer Value. This time, as we can see from the diagram, the
security value is less than loan balance agian, but the total
security value is still above the loan balance. So
the Margin Call Amount = Loan Balance - Security
Value is still within the buffer -- greater than the 50%
of the buffer though. So, the account is not under Margin Call yet,
but under the Buffer Alert.
Note: the Shortfall here is a negative value.
PAC-INVEST provide margin lending, trading and risk management
development and systems support.
Copyright PAC-INVEST PTY LTD 2012