What is required from investors to trade in standardized exchange-traded derivatives?

What is required from investors to trade in standardized exchange-traded derivatives?

• A. A license for trading
• B. An initial deposit
• C. Long-term commitment
• D. A large investment capital

Answer: (B)

The requirement for investors to make an initial deposit when trading in standardized exchange-traded derivatives is fundamentally linked to the mechanics of derivatives trading itself. This initial deposit, often known as margin, serves as a security for the broker and the exchange. It ensures that the investor has a vested interest in fulfilling their contractual obligations and helps mitigate the risk of default on trades. When investors engage in trading derivatives, they are entering contracts that have the potential for significant leverage. This means that a relatively small amount of capital can control a much larger position in the market. The initial deposit acts as collateral for this leverage, ensuring that both the investor and the broker have some financial assurance should the market move against the investor’s position. By maintaining this margin account with an initial deposit, traders are also generally required to monitor their positions regularly. If the market fluctuates, traders may need to deposit additional funds to maintain their positions, based on the exchange's margin requirements. Through this structure, the exchange promotes stable trading practices and protects the integrity of the market, allowing for standardized terms and greater liquidity in derivatives trading.

The requirement for investors to make an initial deposit when trading in standardized exchange-traded derivatives is fundamentally linked to the mechanics of derivatives trading itself. This initial deposit, often known as margin, serves as a security for the broker and the exchange. It ensures that the investor has a vested interest in fulfilling their contractual obligations and helps mitigate the risk of default on trades.

When investors engage in trading derivatives, they are entering contracts that have the potential for significant leverage. This means that a relatively small amount of capital can control a much larger position in the market. The initial deposit acts as collateral for this leverage, ensuring that both the investor and the broker have some financial assurance should the market move against the investor’s position.

By maintaining this margin account with an initial deposit, traders are also generally required to monitor their positions regularly. If the market fluctuates, traders may need to deposit additional funds to maintain their positions, based on the exchange's margin requirements.

Through this structure, the exchange promotes stable trading practices and protects the integrity of the market, allowing for standardized terms and greater liquidity in derivatives trading.