Explanation:
Initial margins are primarily designed to cover the potential future exposure of a transaction over a specified period of time. The main determinant of the initial margin is, therefore, risk of the transaction. In other words, initial margins serve as a financial buffer in the derivatives and securities trading world. Their primary purpose is to safeguard against potential adverse price movements that could occur over a certain time frame. In essence, they act as a form of security deposit that is taken to ensure that parties to the transaction can meet their obligations.
Q.849 Margins are usually of two types – initial margins and variation margins. Both required margins are calculated based on different variables. Which of the following is the determinant of the initial margin?
A
Ratings of the borrower.
B
Risk of the transaction.
C
The creditworthiness of the borrower.
D
Discretion of the parties involved.
No comments yet.