In this paper I develop a new method of setting the margin level in future markets. Extreme value theory is used to derive the margin level for a given probability of margin violation desired by margin committees or brokers. Extreme movements are central to the problem of margin setting since only a large price variation may cause brokers to incur losses. The method takes into account the appropriate amount of extremes in the distribution of price changes and provides a simple analytical formula to compute the margin level. I also present an empirical study using prices of the silver futures contract traded on COMEX.
LONGIN, F. (1999). Optimal Margin Level in Future Markets: Extreme Price Movements. Journal of Futures Markets, pp. 127-152.