How Does the Exchange Calculate the Required Initial Margin for a Position?
The required Initial Margin is calculated as a percentage of the total notional value of the position. This percentage is inversely related to the leverage chosen by the trader.
For example, 10x leverage requires a 10% Initial Margin (1/10). The exchange also employs a tiered margin system where larger positions require a higher Initial Margin percentage, even at the same leverage, to account for the increased risk associated with position size.
Glossar
Initial Margin
Collateral ⎊ Initial margin represents the equity a trader must deposit with a broker or exchange as a good faith commitment to cover potential losses arising from derivative positions, notably within cryptocurrency markets.
Required Initial Margin
Collateral ⎊ Required Initial Margin represents a quantified amount of capital, stipulated by exchanges or clearinghouses, that a participant must deposit as a performance bond prior to establishing a derivatives position, functioning as a first line of defense against counterparty credit risk.
Tiered Margin System
Leverage ⎊ A tiered margin system within cryptocurrency, options, and derivatives trading dictates the amount of capital required to maintain a position, scaling inversely with position size; this structure directly influences trading leverage, impacting both potential profitability and risk exposure.