How Does a “Stress Test” Scenario Affect the Margin Requirements Set by an Exchange?
A stress test scenario involves simulating extreme, yet plausible, adverse market movements to determine the maximum potential loss a portfolio could sustain. Exchanges use the results of these stress tests to ensure the calculated margin requirements are sufficient to cover losses even under severe market conditions, often leading to a higher base margin requirement.
Glossar
Stress Test Scenarios
Design ⎊ Stress Test Scenarios are carefully constructed hypothetical market environments, deliberately designed to represent extreme, low-probability events that could severely impact a derivatives portfolio or clearing house.
Stress Tests
Calibration ⎊ Stress tests within cryptocurrency, options trading, and financial derivatives represent systematic procedures designed to evaluate the resilience of portfolios and trading strategies to extreme, yet plausible, market events.
Stress Test
Simulation ⎊ A stress test is a simulation technique used to evaluate the resilience of a financial institution or portfolio under extreme, adverse market conditions.
Maximum Potential Loss
Exposure ⎊ Maximum Potential Loss (MPL) within cryptocurrency, options trading, and financial derivatives represents the theoretical worst-case financial detriment an investor could incur from a specific position or portfolio.
Stress Testing
Exposure ⎊ The core of stress testing within cryptocurrency derivatives, options trading, and financial derivatives revolves around quantifying potential losses under extreme, yet plausible, market conditions.