How Do Margin Requirements Change for Volatile Crypto Derivatives?
Due to the extreme volatility of cryptocurrencies, clearing houses impose significantly higher initial margin requirements. The margin models use larger stress parameters to capture potential price swings.
Higher margin acts as a crucial safeguard against rapid, large losses, reflecting the higher inherent risk in the crypto market.
Glossar
Inherent Risk
Exposure ⎊ The inherent risk, within cryptocurrency derivatives, options trading, and broader financial derivatives, represents the unavoidable risk embedded within an asset or contract itself, irrespective of market conditions or hedging strategies.
Clearing Houses
Settlement ⎊ Clearing houses, within cryptocurrency derivatives, function as central counterparties mitigating counterparty credit risk through novation of trades.
Margin Requirements Change
Adjustment ⎊ A margin requirements change refers to the dynamic adjustment of collateral thresholds by a derivatives exchange or protocol.
Stress Parameters
Definition ⎊ Stress parameters are the specific input variables and their defined magnitudes of change utilized in financial models to simulate adverse market conditions during stress testing.
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.
Extreme Volatility
Momentum ⎊ Within cryptocurrency derivatives and options trading, extreme volatility manifests as a rapid and sustained acceleration of price movements, often exceeding historical ranges and predictive models.