Can Cross-Collateralization Mitigate Margin Call Risks in Crypto Derivatives?
Yes, cross-collateralization can mitigate risk by allowing a trader to use profits or collateral from one derivatives position to offset losses or margin requirements on another. This pooling of collateral across multiple positions provides a larger buffer against adverse price movements in a single asset.
However, it also links the risk of all positions, potentially leading to a larger, simultaneous liquidation if the entire portfolio moves against the trader.
Glossar
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
Simultaneous Liquidation
Trigger ⎊ Simultaneous Liquidation is an automated risk management action Trigger that forcibly closes multiple open leveraged positions within a cross-margin account at the same time.
Adverse Price Movements
Volatility ⎊ Adverse price movements, particularly within cryptocurrency derivatives and options markets, represent deviations from anticipated price trajectories, often characterized by heightened instability and accelerated rate of change.
Margin Call Risks
Exposure ⎊ Margin call risks refer to the potential financial and operational challenges faced by traders when their account equity falls below the maintenance margin level, triggering a demand for additional collateral.
Non-Linear Derivatives
Derivation ⎊ Non-linear derivatives, within the context of cryptocurrency, options trading, and broader financial derivatives, represent pricing models and analytical techniques that deviate from the assumptions of linearity inherent in models like Black-Scholes.