How Do Portfolio Diversification Benefits Interact with a Unified Margin System?
In a unified margin system, diversification benefits are realized when assets in the portfolio are not perfectly correlated. A loss in one asset may be offset by a gain in another, reducing the net portfolio risk.
This lower net risk can lead to a more favorable margin requirement than if each position were margined separately.
Glossar
Diversification
Allocation ⎊ The strategic distribution of capital across a spectrum of assets ⎊ cryptocurrencies, options contracts, and financial derivatives ⎊ represents a core tenet of risk mitigation.
Diversification Benefits
Hedging ⎊ Diversification benefits within cryptocurrency, options, and derivatives markets stem from the capacity to mitigate idiosyncratic risk through non-correlated asset exposures, reducing portfolio volatility without necessarily sacrificing expected returns.
High Positive Correlation
Convergence ⎊ High positive correlation within cryptocurrency, options, and derivatives signifies a tendency for asset prices to move in the same direction and magnitude, amplifying systemic risk exposure.
Unified Margin
Collateralization ⎊ Unified Margin represents a risk-based approach to collateral requirements within cryptocurrency derivatives exchanges, dynamically adjusting margin levels based on an aggregate assessment of a trader’s positions and associated volatility.
Portfolio Diversification Benefits
Benefit ⎊ Portfolio Diversification Benefits arise from constructing a derivatives book where positions exhibit low or negative correlation, thereby reducing the overall standard deviation of portfolio returns for a given expected return level.