Template:Variationmargindescription: Difference between revisions

[[Variation margin]] is a [[credit mitigation technique]] designed to minimise [[credit risk]] under [[derivative]] transactions. It requires derivative counterparties give each other [[collateral]] — typically [[cash]] — each day to ensure that their net collateralised exposure is (more or less) nil. For example, if the net [[replacement value]] of the swaps between two counterparties on a given day is $10 million, the “[[out-of-the-money]]” party, who would have to pay it were all the transactions terminated, has to pay the “[[in-the-money]]” counterparty $10 million in [[cash]] (subject to agreed {{csaprov|threshold}}s and {{csaprov|minimum transfer amount}}s). This happens every day; variation margin can be paid either way, depending on how the net portfolio moves. [[volatility|Volatile]] markets can quickly move — a day is a long time when [[black swan]]s are on the wing — so parties often want a little something extra to tide them over for expected movements between now and the next variation margin payment date. For that, you need [[initial margin|''initial'' margin]].