What Is a ‘Stress Test’ and How Does It Inform Collateral Requirements?
A stress test is a risk management technique that simulates extreme but plausible market scenarios, such as a sharp price crash or a sudden liquidity freeze, to determine the resulting loss on a derivatives portfolio. The losses calculated from these stress scenarios are used to ensure that the initial margin requirement is robust enough to cover potential losses even beyond the standard VaR calculation.
This informs the collateral requirements by setting a higher floor for the initial margin.
Glossar
Stress Scenarios
Calibration ⎊ Stress scenarios in cryptocurrency derivatives represent systematic evaluations of portfolio sensitivity to extreme, yet plausible, market movements, extending traditional risk management techniques to account for the unique characteristics of digital assets.
Stress Test
Simulation ⎊ A stress test is a simulation technique used to evaluate the resilience of a financial institution or portfolio under extreme, adverse market conditions.