# Derivatives

The derivatives market is bigger than the value of the financial assets their price follows. And it’s not even close. Discover why these instruments are so attractive for risk management and speculation.

## Initial Margin vs. Variation Margin for OTC Derivatives

In derivatives trading, initial margin is collateral exchanged at the beginning of the contract to protect a party from the possibility of default of its counterparty. Variation margin is another type of collateral, paid every day throughout the life of…

## Commitment Approach vs. VaR (UCITS Leverage Calculation)

To calculate the exposure of a UCITS fund, the commitment approach estimates the leverage caused by all the derivatives in the portfolio. In contrast, the VaR approach measures the maximum potential loss within a specified time period due to market…

## Credit Risk vs. Counterparty Risk: Is There Any Difference?

Both credit risk and counterparty credit risk refer to the same thing—that the firm on the other side of a transaction defaults and is no longer able to repay its obligations. Credit risk usually refers to the potential loss that…

## Sticky Delta Rule Explained in 3 Easy Steps

The sticky delta rule refers to the assumption that the implied volatility of options with a certain delta will stay the same as the underlying asset price fluctuates up or down. It is also called the volatility-by-moneyness rule, as options…

## The VIX Formula: Full Calculation Explained in 8 Easy Steps

The VIX Index calculation takes the variance of two sets of SPX options with expiration dates between 23 to 37 days in the future. Then, it interpolates the variance between both. Finally, it takes the square root of that and…

## VXX vs VIX: Do You Understand the Difference?

The difference between the VIX and the VXX is that the VXX is an ETN (exchange-traded note) that tracks the performance of a basket of VIX futures contracts. On the other hand, the VIX index is a theoretical construct that…

## Can You Short the VIX? Here are 4 Things You Need to Know

Yes, you can short the VIX. There are a couple of ways to do it, namely: You can short VIX futures, you can buy put options on these futures, or you can short VIX ETFs (or buy VIX inverse ETFs).…

## Ultimate Guide to Put-Call Parity with Continuous Dividends

Put-call parity with continuous dividends is different from put-call parity without dividends. Dividends increase the value of the underlying asset. Thus, if you want to maintain put-call parity, you need to eliminate this effect by discounting the underlying asset’s price…

## One-Step Binomial Model for Pricing Options

This is a basic introduction to understanding the logic behind the one-step binomial model. We won’t be going deep on the algebra. This overview of the binomial option pricing model will help you understand the: Binomial trees widely used to…