Does the Initial Margin Requirement Change Based on the Volatility of the Underlying Asset?
Yes, the initial margin requirement is directly influenced by the volatility of the underlying asset. Higher volatility means there is a greater potential for large price swings, increasing the risk of significant losses.
To mitigate this increased risk, clearing houses will typically raise the initial margin requirement for futures contracts on more volatile assets, such as many cryptocurrencies.
Glossar
Margin Requirement
Collateralization Standard ⎊ Margin Requirement is the minimum amount of collateral, expressed as a percentage of the notional value, that a trader must deposit to open or maintain a leveraged derivatives position, ensuring the exchange has a buffer against adverse price movements.
Initial Margin Requirement
Definition ⎊ Initial margin requirement specifies the minimum amount of capital a trader must deposit into a margin account to open a new leveraged position in a derivative contract.
Futures Contracts
Mechanism ⎊ Futures contracts, within cryptocurrency and broader financial derivatives, represent standardized agreements obligating parties to transact an asset at a predetermined price on a specified future date; these instruments facilitate price discovery and risk transfer, extending beyond traditional commodities to encompass digital assets and complex financial indices.
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.
Clearing Houses
Settlement ⎊ Clearing houses, within cryptocurrency derivatives, function as central counterparties mitigating counterparty credit risk through novation of trades.