What Is the Role of ‘Initial Margin’ in Perpetual Swaps?
Initial margin in perpetual swaps serves the same function as in traditional futures: it is the collateral required to open a leveraged position. It acts as a performance bond to cover potential losses and is a fraction of the total contract value.
The initial margin level determines the maximum leverage a trader can use. It is crucial for the exchange's risk management, ensuring that traders have sufficient capital to absorb adverse price movements before the liquidation process begins.
Glossar
Maximum Leverage
Amplification ⎊ Maximum leverage, within cryptocurrency and derivatives markets, represents the utilization of borrowed capital to increase the potential return of an investment, fundamentally altering risk-exposure profiles.
Adverse Price Movements
Volatility ⎊ Adverse price movements within cryptocurrency derivatives, options, and financial derivatives represent deviations from anticipated price trajectories, often amplified by leverage and market microstructure effects.
Performance Bond
Bond ⎊ A performance bond, within the context of cryptocurrency derivatives and options trading, represents a specialized financial instrument designed to mitigate counterparty risk associated with leveraged positions.
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.