How Does Stress Testing Inform the “Add-on” Margin Component?
Stress testing results can reveal portfolio vulnerabilities that are not fully captured by the standard Initial Margin calculation (e.g. concentration risk, illiquidity risk). The add-on margin is an extra layer of collateral required to cover these specific, identified risks that the stress scenarios highlight, ensuring the total margin is sufficient even under duress.
Glossar
Initial Margin Calculation
Calculation ⎊ Initial margin calculation, within cryptocurrency derivatives, options trading, and broader financial derivatives contexts, represents a crucial risk management process.
Stress Scenarios
Calibration ⎊ Stress scenarios in cryptocurrency derivatives represent systematic evaluations of portfolio sensitivity to extreme, yet plausible, market movements, extending traditional risk management techniques to account for the unique characteristics of digital assets.
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.
Testing
Validation ⎊ Testing within cryptocurrency, options trading, and financial derivatives serves as a critical process for confirming the accuracy and reliability of models, algorithms, and trading systems before deployment.