How Does Portfolio ‘Diversification’ Affect the Overall Margin Requirement in a Risk-Based Model?
Diversification reduces the overall margin requirement in a risk-based model. By holding positions that are not perfectly correlated, the potential loss from the portfolio as a whole is less than the sum of the potential losses from each individual position.
The risk model captures this netting benefit, leading to a lower initial margin requirement for a well-diversified portfolio compared to a concentrated one.
Glossar
Initial Margin Requirement
Definition ⎊ Initial margin requirement specifies the minimum amount of capital a trader must deposit into a margin account to open a new leveraged position in a derivative contract.
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.
Margin Requirement
Collateralization Standard ⎊ Margin Requirement is the minimum amount of collateral, expressed as a percentage of the notional value, that a trader must deposit to open or maintain a leveraged derivatives position, ensuring the exchange has a buffer against adverse price movements.