How Does Collateralization (Margin) Help Mitigate Delivery Risk?
Collateralization mitigates delivery risk by requiring the option writer to post a sufficient amount of the underlying asset or cash as margin with the clearing house. If the writer defaults and fails to deliver the asset upon exercise, the clearing house uses this collateral to fulfill the delivery obligation to the buyer, ensuring the contract is honored.
Glossar
Delivery Risk
Hazard ⎊ Delivery Risk represents the potential for a counterparty in a physically-settled cryptocurrency derivative contract to fail in providing the underlying digital asset at the agreed-upon settlement date.
Clearing House
Role ⎊ The Clearing House acts as a central counterparty (CCP) in traditional and centralized crypto derivatives markets, interposing itself between buyers and sellers to guarantee the performance of the contract.