Explain the Concept of ‘Liquidation Risk’ and How Cross-Margining Can Mitigate It.
Liquidation risk is the danger that a broker or exchange will be forced to close out a client's positions at unfavorable prices to meet a margin call, potentially causing a loss greater than the remaining collateral. Cross-margining mitigates this by consolidating all positions, meaning a loss in one position can be covered by a profit in another, delaying or preventing a margin call.
This reduces the likelihood of premature, forced liquidation across the entire portfolio.
