Define “Margin Requirement” in the Context of Derivatives and Its Relation to Netting.
Margin requirement is the collateral that a trader must deposit with a broker or clearing house to cover potential losses from adverse price movements in a derivatives position. Netting significantly reduces the margin requirement.
By offsetting gains and losses across multiple positions, the net exposure is lower, which in turn lowers the calculated potential loss and therefore the amount of collateral needed. This directly enhances capital efficiency.
Glossar
Adverse Price Movements
Volatility ⎊ Adverse price movements within cryptocurrency derivatives, options, and financial derivatives represent deviations from anticipated price trajectories, often amplified by leverage and market microstructure effects.
Netting
Calculation ⎊ This is the mathematical process of offsetting mutual obligations between two counterparties across a portfolio of derivative contracts to determine a single net liability or asset position.
Margin Requirement
Collateral ⎊ Within cryptocurrency derivatives and options trading, collateral represents the assets pledged by a trader to cover potential losses arising from leveraged positions.