How Do Major Exchanges Mitigate Delivery Risk for Physically Settled Crypto Options?
Major exchanges mitigate delivery risk by requiring option writers to post collateral (margin) that is greater than the maximum potential loss. Upon exercise, the clearing house uses the writer's collateral to ensure the physical transfer of the underlying cryptocurrency to the buyer, guaranteeing the delivery and isolating the buyer from the writer's potential default.
Glossar
Delivery Risk
Settlement Failure ⎊ Delivery Risk in derivatives trading refers to the possibility that one counterparty fails to deliver the underlying asset as contractually obligated upon exercise or expiration, typically occurring in physically settled contracts.
Major Exchanges
Liquidity ⎊ Major exchanges, functioning as central limit order books or increasingly, hybrid automated market makers, represent critical infrastructure for price discovery and efficient capital allocation within cryptocurrency, options, and derivatives markets.
Physically Settled Crypto
Settlement ⎊ Physically settled crypto derivatives represent a class of contracts where the obligation at expiry is fulfilled through the direct delivery of the underlying cryptocurrency asset, rather than a cash settlement.