What is Value at Risk (VaR), Extreme Loss Margin (ELM), and Adhoc margins?
Value at Risk (VAR) is a statistical measure used in risk
management to estimate the potential loss in value of a portfolio of assets due
to market movements over a certain time period and with a certain level of
confidence. VAR is commonly used in financial risk management, which helps
estimate a portfolio's potential downside risk.
Extreme Loss Margin (ELM) is an additional margin charged by exchanges in
addition to the normal margin requirements. ELM is designed to cover the risk
of losses beyond the level predicted by VAR models. ELM is usually a fixed
percentage of the value of the contract and is applied to both buy and sell
positions.
Adhoc margins refer to additional margins that can be imposed by exchanges on
market participants on an ad hoc basis. These margins are applied when the
exchange perceives that there is a higher risk of default, volatility, or other
market conditions that could lead to higher losses. Adhoc margins are typically
imposed in addition to the normal margin requirements and are designed to
protect the market and its participants from unexpected risks.