ABSTRACT

As a central counterparty in all transactions, it is important for Indonesian

Derivatives Clearing House (PT Kliring Berjangka Indonesia (Persero)),
abbreviated KBI, to find the appropriate counting method to obtain a value that
can cover the maximum daily price movement which may occur during one
trading day. The value of initial margin is expected to cover that price
movements. Conventional value at risk (VaR) models based on the central limit
theorem are not able to capture the extremes value in tail of price movement
distribution. The analysis concerning the statistical distribution of extreme events
(e.g. equity market crashes), is considered to be important for modern risk
management. This study applies Generalized Extreme Value Distribution (GEVD)
and Generalized Pareto Distribution (GPD) theory to the extreme tails of the price
movements distributions for the index contract i.e the HangSeng, Nikkei, KOSPI
and also foreign cross currency contract i.e EUR/USD and GBP/USD during
January 1990 until December 2009 to estimate VaR and then using the VaR to
determine the initial margin. This study uses several steps in estimating VaR
using GEVD and GPD model, that is, parameter estimation, goodness of fit
through Kolmogorov-Smirnov test, estimation of VaR extreme value and
backtesting step using binomial test. The result of binomial test at backtesting step
using GEVD model shows that probability of actual value exceeds the VaR
extreme value is less than 5%, whereas using GPD model, the probability is less
than 6%. The GEVD and GPD model generate different initial margin value. The
initial margin based on GEVD model is 1.5 higher than the GPD model for almost
all of the contracts. It can be concluded that the GPD model is better than the
GEVD model referring to the binomial test results. The initial margin value that
generated from the GPD model could represent the extreme values of initial
margin. High initial margin, as generated from GEVD model, is too conservative.
This will not only burden the investors who make transactions in the futures
market but also potentially will reduce the interest of investors and the revenue of
KBI. Based on this calculation, it is recommended for KBI to use GPD model as
the method to obtain the value of initial margin. Furthermore, the GPD model is in
accordance with the risk appetite of KBI that has been stated in the General
Guidelines for Risk Management.

Keywords: value at risk, generalized extreme value distribution, generalized

pareto distribution, initial margin, backtesting.