What Is the Primary Risk When Trading a Derivative Contract?
The primary risk when trading derivatives, especially leveraged ones, is market risk combined with the risk of liquidation. Due to leverage, a small adverse price movement in the underlying asset can lead to a significant loss, potentially wiping out the entire margin collateral.
This magnified risk of loss, which can exceed the initial investment in extreme cases, is the core danger. Counterparty risk is also a factor in over-the-counter derivatives.
Glossar
Market Risk
Exposure ⎊ The inherent vulnerability within cryptocurrency derivatives, options trading, and broader financial derivatives stems from the complex interplay of leveraged positions, volatile underlying assets, and intricate pricing models.
Adverse Price Movement
Exposure ⎊ Adverse price movement within cryptocurrency derivatives represents a deviation from anticipated directional forecasts, impacting portfolio valuations and risk parameters.
Margin Trading
Leverage ⎊ Margin trading within cryptocurrency, options, and derivatives markets represents the utilization of borrowed capital to amplify potential investment returns, though simultaneously increasing exposure to risk.
Initial Investment
Capitalization ⎊ Initial investment, within cryptocurrency, options, and derivatives, represents the foundational outlay required to establish a position or initiate a trading strategy, directly impacting potential returns and risk exposure.
Counterparty Risk
Exposure ⎊ Counterparty risk represents the potential loss incurred when a trading partner defaults on their contractual obligations.