VM Calculation

VM is a daily calculation which uses the end-of-day valuations of all the trades in a portfolio. The procedure for calculating VM follows these steps:

• Calculate an end-of-day valuation for every trade in the relevant portfolio. There may be a provision in your CSA to use mid-market prices for the valuations, check your documentation.
  
• For each trade in the portfolio
  
• If the trade is making profit for your firm, keep the valuation as a positive value
• If the trade is making a loss for your firm, make the valuation a negative value
• Add up all the positive and negative valuations to arrive at today's net valuation for the entire portfolio
  
• Subtract yesterday's net valuation from todays net valuation to arrive at today's variation margin
  
• If the amount of variation margin has gone up
  
• Call your counterparty for assets to cover that increase
• If the amount of variation margin has gone down
  
• Expect to receive a call from your counterparty to return assets