Which type of margin is required at the initiation of a derivatives contract?

The required type of margin at the initiation of a derivatives contract is known as the initial margin. This margin acts as a security deposit to cover potential losses on an open position and ensures that both parties have a financial commitment to the contract. It is typically expressed as a percentage of the notional value of the contract and is required to be posted when the derivatives position is first established.

The initial margin serves as a buffer against market volatility and protects clearinghouses from default risk. It ensures that traders can meet their obligations in the event of price fluctuations, thereby contributing to the overall stability of the derivatives market. As positions are marked to market after the contract initiation, any gas escaping would necessitate adjustments through the posting of variation margin to cover additional daily price movements.

Understanding this concept is crucial for effective risk management and maintaining the integrity of financial transactions involving derivatives.