What Is the Purpose of a Stress Testing Framework in Calculating Margin Requirements?
Stress testing involves simulating extreme but plausible market scenarios (e.g. sudden, massive price drops or volatility spikes) to determine if the calculated Initial Margin is sufficient to cover losses under duress. This framework helps a clearing house or prime broker ensure the resilience of its margin model and prevent a member's default from causing systemic instability.
Glossar
Stress Testing
Exposure ⎊ The core of stress testing within cryptocurrency derivatives, options trading, and financial derivatives revolves around quantifying potential losses under extreme, yet plausible, market conditions.
Hypothetical Stress Testing
Scenario ⎊ Hypothetical stress testing, within the context of cryptocurrency derivatives, options trading, and broader financial derivatives, represents a quantitative risk management technique designed to evaluate portfolio or system resilience under extreme, yet plausible, market conditions.
Stress Testing Crypto
Evaluation ⎊ Stress testing crypto involves simulating extreme market scenarios, such as sudden price crashes, liquidity crises, or high network congestion, to evaluate the resilience of trading platforms and investment portfolios.
Stress Testing Framework
Calibration ⎊ A Stress Testing Framework within cryptocurrency, options, and derivatives contexts necessitates rigorous calibration of model parameters to reflect observed market dynamics and inherent risks.