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Variation margin

AnalyticsTrade Team
AnalyticsTrade Team Last updated on 26 Apr 2023

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Variation Margin

Variation margin is a type of margin used in derivatives trading. It is a payment made by one party to another to cover any losses that have occurred due to changes in the value of the underlying asset. It is also known as mark-to-market margin, and is used to ensure that both parties in a derivatives contract are able to meet their obligations. Variation margin is typically paid in cash, and is calculated on a daily basis.

History of Variation Margin

The concept of variation margin has been around since the early days of derivatives trading. It was first used in the early 20th century, when derivatives were used to hedge against price fluctuations in commodities. As derivatives trading became more popular, the need for variation margin became more apparent. In the late 1980s, the Chicago Mercantile Exchange (CME) introduced the concept of variation margin to its derivatives contracts. This allowed traders to better manage their risk and ensure that they were able to meet their obligations.

Since then, variation margin has become an integral part of derivatives trading. It is now used in a variety of markets, including commodities, currencies, and stocks. Variation margin is also used in futures and options trading, as well as in the over-the-counter (OTC) derivatives market.

Table of Comparisons

Type of Margin Purpose Payment
Initial Margin To cover potential losses Cash or securities
Variation Margin To cover losses due to changes in value Cash

Summary

Variation margin is a type of margin used in derivatives trading. It is a payment made by one party to another to cover any losses that have occurred due to changes in the value of the underlying asset. It is also known as mark-to-market margin, and is used to ensure that both parties in a derivatives contract are able to meet their obligations. Variation margin is typically paid in cash, and is calculated on a daily basis. For more information about variation margin, you can visit websites such as Investopedia, The Balance, and the CME Group.

See Also

  • Initial Margin
  • Mark-to-Market
  • Derivatives
  • Futures
  • Options
  • Over-the-Counter (OTC) Derivatives
  • Commodities
  • Currencies
  • Stocks
  • Margin Call

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