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NISM Certifications · NISM-Series-VII: Securities Operations and Risk Management · Risk Management

In the context of a stock broker's risk management, what is the main purpose of a 'Value at Risk (VaR) margin' collected from clients?

VaR margin is collected to cover the potential loss on a position from adverse price movements over a specified time horizon at a stated confidence level. It is a risk-protection deposit, not a charge or a payout, so it protects the clearing system against defaults.

  1. ATo cover the potential loss in a position from adverse price movement over a given time horizon at a given confidence levelCorrect
  2. BTo pay the exchange's transaction charges on every trade
  3. CTo fund the broker's dividend payouts to clients
  4. DTo guarantee the settlement of other brokers' trades

Explanation

VaR margin is a statistical estimate of the potential loss on a position over a defined horizon at a given confidence level. It is collected to cover this likely loss. It is not a fee, and it does not fund dividends or guarantee other brokers' trades.

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