Risk array
The set of scenarios SPAN evaluates to estimate the maximum likely loss a derivative position could suffer over the next trading day, which is what initial margin is sized to cover.
In plain language
Initial margin has to be big enough to cover a bad day, but not so big that it locks up money for no reason. Someone has to work out, in advance, how bad "a bad day" could reasonably be.
The risk array is that calculation. It represents how much a specific derivative position could gain or lose in value, from now to a set point in the near future, across a range of market conditions.
How it works
The time horizon is fixed at one trading day (Chapter 7). Using SPAN (Standard Portfolio Analysis of Risk), the clearing corporation evaluates the risk array to estimate the maximum likely loss a position could reasonably suffer over that single trading day. This maximum-likely-loss figure is what the clearing corporation then collects as initial margin, computed by SPAN up to the client level for every open position of a clearing member.
Margins are required to be paid up-front, before the position is allowed to run, precisely because the risk array has already estimated what a one-day adverse move could cost.
A worked example
A clearing member holds an open Nifty futures position. SPAN evaluates the risk array across a set of plausible one-day price-move scenarios for the Nifty — say, moves ranging from a fall of 3% to a rise of 3% — and identifies the scenario that would produce the largest loss on this specific position.
That worst-case one-day loss, from the risk array, becomes the basis for the initial margin SEBI/the clearing corporation requires the member to post up-front for this position — collected before the position is allowed to be carried further, not after a loss has already happened.
Why NISM asks about it
Chapter 7 introduces the risk array immediately before describing how SPAN computes initial margin, framing the risk array as the one-day, scenario-based loss estimate that initial margin is sized against. Expect a question on the time horizon used (one trading day) or on what SPAN evaluates to arrive at the margin figure.
Common exam traps
- The risk array's time horizon is one trading day, not the life of the contract or any other period.
- SPAN uses the risk array to size initial margin, which is collected up-front, before the position runs — not after a loss occurs.
- Margins from SPAN are computed up to the client level, not just at the clearing member's aggregate level.
Where this is taught
Free preparation for NISM Series VIIIRelated terms
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Initial marginThe deposit both the buyer and the seller of a futures contract must place before the position is accepted, sized to cover a 99% worst-case one-day loss on that position.
- Intraday Crystallised LossesA margin the clearing corporation levies in real time on losses that become certain intraday when a trade closes out an open futures position, computed on weighted average trade prices.