Value at Risk (VAR) is a risk measurement tool used in risk management to estimate the potential loss in a portfolio's value due to market movements over a specific time period and with a certain confidence level. VAR helps estimate the portfolio's potential downside risk by answering "How much is the portfolio likely to lose over the next day?" Financial institutions commonly use VAR in risk management to predict potential downside losses.
Extreme Loss Margin (ELM) is an additional margin charged by exchanges beyond normal margin requirements. ELM covers losses that may exceed predictions from VAR models. Exchanges apply ELM as a fixed percentage of the contract value to both buy and sell positions. For index derivatives, ELM is typically 2% of the notional value, while for stock derivatives, it is 3.5%.
Adhoc margins are additional margins that exchanges impose on market participants on an ad-hoc basis. Exchanges apply these margins when they perceive higher risks of default, volatility, or other market conditions that could lead to greater losses. Adhoc margins are imposed on top of normal margin requirements to protect the market and its participants from unexpected risks.
How Zerodha applies these margins
Zerodha requires the entire margin upfront for equity delivery trades. For intraday trades, margin requirements are available on Zerodha's margin calculator.
Zerodha displays adhoc margins as Delivery margin on the Kite funds page. Insufficient margin (VAR+ELM+Adhoc) leads to margin penalties due to the upfront margin requirements.