Explain the Difference between ‘Isolated Margin’ and ‘Cross Margin’.
Isolated margin is a margin mode where the collateral allocated to a specific position is restricted to that position alone. If the position is liquidated, only the margin allocated to it is lost.
Cross margin, conversely, uses the entire available balance in the margin account to support all open positions. While cross margin can prevent a single position from being liquidated early, a large loss on one position can potentially liquidate the entire account balance, spreading the risk across all assets.
Glossar
Cross Margin Vs Isolated Margin
Paradigm ⎊ Cross Margin versus Isolated Margin delineates two fundamental risk management paradigms employed in cryptocurrency derivatives trading platforms.
Isolated Margin Operations
Isolation ⎊ Isolated margin operations represent a risk management framework where the collateral allocated to a specific leveraged position is ring-fenced from the rest of the trader's account balance.
Cross Margin Explanation
Concept ⎊ Cross Margin is a collateralization methodology where the entire available balance within a trading account is pooled and utilized to meet the margin requirements of all open positions across multiple financial instruments or contracts.
Cross Margin Benefits and Drawbacks
Leverage ⎊ Cross margin, prevalent in cryptocurrency derivatives and options trading, fundamentally allows traders to utilize borrowed funds from an exchange to amplify their trading positions beyond their initial capital.
Trading Leverage Concepts
Principle ⎊ Trading leverage concepts revolve around the fundamental financial principle of controlling a large notional position in an asset with a comparatively small amount of capital.
Primary Risk of Cross Margin
Leverage ⎊ The core of cross margin lies in its amplified exposure, allowing traders to access significantly larger positions relative to their deposited collateral.
Liquidation Risk Control
Margin ⎊ Liquidation risk control begins with the establishment of initial and maintenance margin requirements, which serve as the primary buffer against adverse price movements in leveraged positions.
Isolated Vs Cross Margin
Architecture ⎊ The fundamental difference lies in the margin architecture: isolated margin dedicates collateral to a specific position, whereas cross margin pools all account equity to cover aggregate margin requirements.
How Isolated Margin Works
Mechanism ⎊ Isolated margin functions by dedicating a specific portion of a trader's collateral exclusively to a single derivative position, effectively ring-fencing the risk associated with that trade.
Cross Margin Utilization
Efficiency ⎊ Cross Margin Utilization represents a capital management technique where the entire available balance within a trading account serves as collateral for all open positions, encompassing both spot and derivatives contracts.