How Is ‘Value at Risk’ (VaR) Used in Calculating Margin Requirements?
Value at Risk (VaR) is a statistical measure used by CCPs and prime brokers to estimate the maximum potential loss a portfolio could incur over a specified time horizon (e.g. one day) at a given confidence level (e.g. 99%).
The calculated VaR is then used as the basis for the initial margin requirement. The initial margin is set to be at least equal to the VaR, ensuring that the collateral covers the expected worst-case loss scenario.
Glossar
VaR
Measurement ⎊ Value at Risk, within cryptocurrency derivatives, quantifies potential losses in a portfolio over a defined time horizon and confidence level, representing a crucial risk management tool for volatile digital assets.
Calculating Margin
Determination ⎊ Calculating margin represents the quantitative assessment of funds required to establish or maintain a position within cryptocurrency derivatives markets, options trading, or broader financial derivative structures.