ESTIMATING MARGIN CALL PROBABILITIES FOR FOREX TRADERS USING RUIN THEORY
Oyekanmi, Dele Jerry, Hamadu, Dallah,PhD and Lukman Ajijola, PhD
Volume 12 Issue 3
Abstract
This study investigates the estimation of margin call probability for forex traders using Ruin Theory, integrating both analytical and simulation-based approaches to evaluate trader survivability under varying levels of leverage, volatility, and risk behaviour. The research is motivated by the high rate of capital loss among retail forex traders, especially in developing economies like Nigeria, where market volatility and leverage misuse often lead to rapid account depletion. The methodology follows a two-stage analytical–simulation framework. The first stage applies five classical and modern ruin models the Cramér–Lundberg (CLM), Sparre Andersen (SAM), Diffusion Approximation (DA), Random Walk (RW), and Modified Random Walk (MRW) models to estimate theoretical Probability of Ruin (PoR), Expected Trades to Ruin (ETR), and Safe Leverage Ratios for ten synthetic traders (T₁–T₁₀). The second stage uses Monte Carlo simulations with 10,000 trade paths to validate these analytical results based on historical log-return data (2020–2024) for four currency pairs: EUR/USD, GBP/USD, NGN/USD, and NGN/EUR. Empirical findings reveal that ruin probability is inversely related to capital size and positively related to leverage and volatility. Traders with small accounts and high leverage (1:1000) experienced ruin probabilities above 90%, while those using moderate leverage (1:25–1:50) and fixed stop-losses maintained survival probabilities above 60%. The Modified Random Walk model produced the most realistic results, closely matching simulation outcomes and capturing volatility clustering effects observed in forex markets. The study concludes that sustainable trading requires disciplined risk management, moderate leverage, and dynamic adjustment to volatility. It recommends regulatory limits on retail leverage and improved trader education on capital protection strategies. The major contribution of this research lies in extending Ruin Theory to forex trading risk assessment, providing a quantitative framework for predicting margin calls and optimizing leverage. This model serves as a decision tool for traders, brokers, and financial regulators seeking to enhance capital resilience and long-term market participation. Keywords: Analytical Modelling, Forex Trading, Margin Call Probability, Monte Carlo Simulation, Ruin Theory
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