How Is the Margin Requirement Calculated for a Derivatives Contract?
Margin is the collateral an investor must deposit to cover potential losses. It is calculated based on the contract's size, the underlying asset's volatility, and the time to expiration.
Exchanges use a risk-based model (e.g. SPAN) to determine the initial margin.
Maintenance margin is the minimum level required to keep the position open.
Glossar
Volatility
Measurement ⎊ Volatility, in quantitative finance, is the statistical measurement of the dispersion of returns for a given financial asset, typically quantified by the annualized standard deviation of its price movements.
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.
Collateral
Requirement ⎊ Collateral in derivatives trading represents the assets pledged by a market participant to secure their obligations, mitigating the counterparty risk associated with open positions.
Risk-Based Model
Framework ⎊ A risk-based model is a quantitative framework used to identify, measure, and manage potential losses in financial activities.
Maintenance Margin
Collateral ⎊ Within cryptocurrency derivatives and options trading, the maintenance margin represents the minimum equity a trader must maintain in their account to cover potential losses.