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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 on a position?

VaR margin is collected to cover the potential loss on a position from adverse price movement over a specified time horizon at a stated confidence level. It is a risk-protection deposit against default, not a charge, brokerage or compensation for delayed pay-out.

  1. ATo cover the potential loss in the position arising from adverse price movement over a specified time horizon at a given confidence levelCorrect
  2. BTo pay the exchange's transaction charges on the trade
  3. CTo compensate the investor for any delay in pay-out of securities
  4. DTo fund the broker's brokerage income on the trade

Explanation

VaR margin is a statistical estimate of the maximum likely loss on a position over a set horizon at a given confidence level. It is collected upfront to protect the clearing system against default. It has nothing to do with charges, brokerage or pay-out delays.

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