Understanding Net Open Positions (NOP)

Net Open Position (NOP) is a metric used to evaluate a client's exposure to the market. This article explains how NOP is calculated in Kooltra with worked examples.

Overview

In Kooltra, there are three available methods for calculating NOP, each of which is described in detail in the section below.

Which NOP method to use is defined per client account in the system, allowing users to deploy different NOP calculations for different client profiles.

The NOP method to be used for a client is configured under the 'Trading Information' section of the Counterparty Management page as below:

How is NOP calculated?

How NOP is calculated for each client depends on the methodology that has been assigned to the client in question (see the Overview section above). The three methods that can be used to calculate NOP are:

• Gross - the most conservative NOP calculation methodology that sums the exposure associated with each open FX trade

• Currency Buckets - this methodology considers open positions in each currency traded. The system sums the base currency equivalent of all long currency positions, and sums the base currency equivalent of all short currency positions. NOP is calculated as whichever of these has the greater absolute value.

• Currency Pair Buckets - this methodology considers open positions in each currency pair. For each currency pair traded, the system will calculate the net position in each of the constituent currencies and convert this to the base currency. It will then consider the absolute value of these positions in base currency and select whichever is greater. NOP is calculated as the sum of these absolute values across all traded currency pairs.

Each of these calculation methodologies is described in further detail below with examples. In all cases, NOP calculations do not consider closed trades/positions.

Gross Methodology

1. For each open trade, compare Amount 1 USD & Amount 2 USD and take the largest absolute value

2. Sum the values resulting from step 1 for all open trades

3. If USD is not base currency, convert the total into base currency

Currency Bucket Methodology

1. Gather all long positions and add their USD values together

2. Gather all short positions and add their USD values together

3. Convert both values are absolute

4. Take the larger absolute value of either the long or short position in USD

5. If USD is not base currency, convert it into base currency

Currency Pair Bucket Methodology

1. Gather standard currency pairs together (all EURUSD, all USDCAD, all EURCAD)

2. Net out the difference for each currency pair (if you are BUYING a currency this would be considered a “long” position; if you are SELLING a currency this would be considered a “short” position). Long positions would be (+) ive while short positions will be (-) ive.

3. Convert the residual values of CCY1/CCY2 to USD* and take the absolute max

Calculation Examples

Below are some example trades that will be used to demonstrate how NOP is calculated using each of the methods above. In each example our base currency is assumed to be USD.

Gross

Calculation using example: 

• Trade 1000.0: Amount 2 USD is larger (130,000)

• Trade 1001.0:Amount 2 USD is larger (132,000)

• Trade 1002.0: Amount 1 USD is larger (150,000)

• Trade 1003.0:Amount 2 USD is larger (227,253)

• Sum of largest USD amount from each trade: 639,253 USD

• Total NOP = 639,253 USD

Currency Bucket

Calculation using example:

• Positions:

  • 200,000 EUR (225,658 USD)

  • 152,000 USD (152,000 USD)

  • -505,000 CAD (-377,123 USD)

• Long Positions Total: 377,658 USD

• Short Positions Total: 377,123 USD

• Total NOP = MAX ( 377,658, 377,123 ) = 377,658 USD 

Currency Pair Bucket

Calculation using example:

• EURUSD Pair:

  • CCY1 net= 0 EUR (netted from trade 1000.0 & 1001.0)

  • CCY2 net= 2000 USD (netted from trade 1000.0 & 1001.0)

  • Residual Value: 2000 USD

• USDCAD Pair 

  • CCY1 net= 150,000 USD

  • CCY2 net= -201,000 CAD > -149,870 USD (149,870 USD)

  • Residual Value: 150,000  USD

• EURCAD: 

  • CCY1 net= 200,000 EUR (225,658.00 USD)

  • CCY2 net: -304,000 CAD > -227,253 USD (227,253 USD)

  • Residual Value: 227,253 USD

• Total NOP =  EURUSD Residual Value + USDCAD Residual Value + EURCAD Residual Value = 2000 USD + 150,000 USD + 227,253 USD = 379,253 USD