Learning Module 4: Fixed-Income Markets for Corporate Issuers

Fixed Income

NoteDownload Files

Download PDF | Download Word |

---

Initial Margin

\[ \text{Initial Margin} = \frac{\text{Security Price}_0}{\text{Purchase Price}_0} \tag{1} \]

• Feature designed to reduce the risk of a collateral shortfall over the contract life
  
• The feature initial margin is known as the provision of collateral in excess of the cash exchanged

View Markdown Source

### Initial Margin

$$
\text{Initial Margin} =
\frac{\text{Security Price}_0}{\text{Purchase Price}_0} \tag{1}
$$

- Feature designed to reduce the risk of a collateral shortfall over the 
  contract life  
- The feature initial margin is known as the provision of collateral in excess 
  of the cash exchanged  

---

Haircut

\[ \text{Haircut} = \frac{\text{Security Price}_0 - \text{Purchase Price}_0} {\text{Security Price}_0} \tag{2} \]

• A 100% initial margin indicates a fully collateralized loan, while a higher margin indicates even greater initial collateral protection. This is alternatively considered a reduction or haircut of the underlying loan relative to the initial collateral value as shown in formula 2

View Markdown Source

### Haircut

$$
\text{Haircut} = 
\frac{\text{Security Price}_0 - \text{Purchase Price}_0}
{\text{Security Price}_0} \tag{2}
$$

- A 100% initial margin indicates a fully collateralized loan, while a higher 
  margin indicates even greater initial collateral protection. This is 
  alternatively considered a reduction or haircut of the underlying loan 
  relative to the initial collateral value as shown in formula 2  

---

Variation Margin

\[ \text{Variation Margin} = (\text{Initial Margin} \times \text{Purchases price}_t) - \text{Security Price}_t \tag{3} \]

• Repos address collateral value changes by granting contract participants the right to request additional collateral (or release existing collateral) to maintain a security interest equal to the original initial margin terms. This variable margin payment (referred to as variation margin)

View Markdown Source

### Variation Margin

$$
\text{Variation Margin} = (\text{Initial Margin} \times 
\text{Purchases price}_t) - \text{Security Price}_t \tag{3}
$$


- Repos address collateral value changes by granting contract participants the 
  right to request additional collateral (or release existing collateral) to 
  maintain a security interest equal to the original initial margin terms. 
  This variable margin payment (referred to as variation margin)  

---