How Are Initial Margin Requirements Calculated for Options and Derivatives?
Initial margin for options and derivatives is typically calculated using sophisticated risk models like SPAN (Standard Portfolio Analysis of Risk) or VaR (Value at Risk). These models simulate thousands of potential market scenarios, including changes in price and volatility, to estimate the potential loss a portfolio could suffer over a specific time horizon (e.g. two days).
The initial margin is then set at a level high enough to cover this estimated potential loss to a high degree of confidence, such as 99% or 99.5%.
Glossar
Central Counterparties
Clearing ⎊ Acting as an intermediary between buyers and sellers, these entities ensure the smooth functioning of financial markets.
Non-Linear Risk
Exposure ⎊ Within cryptocurrency derivatives and options trading, exposure to non-linear risk arises from the inherent mathematical properties of derivative contracts, particularly those exhibiting options-like behavior.
Portfolio Analysis
Analysis ⎊ This involves the quantitative assessment of an aggregated collection of assets and liabilities, including complex derivatives like options, to determine overall risk exposure and return characteristics.
Initial Margin Requirements
Collateral ⎊ Initial margin requirements, prevalent across cryptocurrency derivatives, options trading, and broader financial derivatives markets, fundamentally represent the sum of funds a trader must deposit with a broker or exchange to cover potential losses arising from leveraged positions.
Portfolio Margining
Leverage ⎊ Portfolio margining within cryptocurrency derivatives represents a risk-based approach to collateralization, differing from static mark-to-market methodologies.
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.