How Is the Initial Margin Amount Typically Calculated by a Clearing House?
Initial margin is calculated by the clearing house using a risk-based methodology, such as the Standard Portfolio Analysis of Risk (SPAN) system or a similar proprietary model. This calculation considers factors like the volatility of the underlying asset, the size of the position, and the time to expiration.
The resulting margin aims to cover a potential loss over a one-day period with a high degree of confidence.
Glossar
Standard Portfolio Analysis of Risk
Quantification ⎊ Standard Portfolio Analysis of Risk, within cryptocurrency and derivatives, extends traditional asset allocation principles to encompass the unique characteristics of these markets, demanding a nuanced approach to risk measurement.
Initial Margin Amount
Requirement ⎊ The initial margin amount represents the minimum collateral required to establish a new leveraged position on a derivatives exchange.
Clearing House
Settlement ⎊ A clearing house, within cryptocurrency and derivatives markets, functions as an intermediary between buyers and sellers, mitigating counterparty risk through a process of novation ⎊ replacing original trade agreements with new ones directly with the clearing house.