What Is “Initial Margin” and How Is It Calculated for a Futures Contract?
Initial margin is the collateral required to be posted by a trader to open a new futures position. It is calculated by the clearing house using a risk-based model (e.g.
VAR or SPAN) to cover the potential loss that could occur on the position over a specified time horizon, typically one day, with a high degree of confidence (e.g. 99%).
It ensures the clearing house is protected from the moment the trade is executed.
Glossar
Clearing House
Role ⎊ The Clearing House acts as a central counterparty (CCP) in traditional and centralized crypto derivatives markets, interposing itself between buyers and sellers to guarantee the performance of the contract.
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.
Margin System
Collateral ⎊ The margin system, across cryptocurrency derivatives, options, and traditional financial instruments, fundamentally relies on collateralization.
Risk-Based Model
Framework ⎊ A risk-based model is a quantitative framework used to identify, measure, and manage potential losses in financial activities.
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.
Underlying Asset
Foundation ⎊ The concept of an Underlying Asset, within cryptocurrency derivatives and financial markets, establishes the core reference point for valuation and risk transfer.