How Does the Correlation between Assets Affect the Effectiveness of Cross-Margining?
The effectiveness of cross-margining is directly proportional to the negative correlation between the assets in the portfolio. If assets are negatively correlated (e.g. one goes up when the other goes down), the margin requirement is significantly reduced because the risk offsets each other.
If assets are positively correlated, the benefit is minimal, as the risks compound, leading to higher margin requirements.
Glossar
Negative Correlation
Relationship ⎊ Negative correlation describes a statistical relationship where the price movements of two assets move inversely to each other.
Correlation between Assets
Correlation ⎊ Correlation between assets quantifies the linear relationship in price movements across two or more distinct financial instruments, ranging from negative one to positive one.