How Do Margin Requirements Mitigate Counterparty Risk in Derivatives Trading?
Margin requirements mitigate counterparty risk by requiring both parties to post collateral (margin) to cover potential losses. If a party defaults, the collateral is used to cover the loss, ensuring the solvent party is protected.
Higher margin requirements reduce the potential for uncollateralized losses, thus lowering counterparty risk.
Glossar
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Solvent Party
Capacity ⎊ A Solvent Party, within cryptocurrency derivatives, fundamentally possesses sufficient capital to meet margin requirements and potential settlement obligations arising from traded positions.
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.
Counterparty Risk in Derivatives
Exposure ⎊ Counterparty risk in derivatives quantifies the potential financial loss incurred if the party on the opposite side of a contract defaults before settlement, failing to make required payments or deliver the underlying asset.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.