How Does Collateralization Affect the Counterparty Risk of a Box Spread?
Collateralization significantly reduces counterparty risk. When an exchange requires both the buyer and seller of options to post collateral (margin), it ensures that funds are available to cover potential losses or payoffs.
For a box spread, which has a fixed, known payoff, the collateral requirement should be minimal but sufficient to cover the worst-case scenario. Full collateralization essentially eliminates the default risk associated with the contract.
Glossar
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.
Portfolio Margining
Leverage ⎊ Portfolio margining within cryptocurrency derivatives represents a risk-based approach to collateralization, differing from static mark-to-market methodologies.
Default Risk
Exposure ⎊ Default risk within cryptocurrency derivatives manifests as counterparty credit risk amplified by market volatility and regulatory uncertainty.
Full Collateralization
Requirement ⎊ Full collateralization mandates that the value of assets pledged as security for a financial obligation equals or exceeds the total value of the debt or leveraged position.