Cross margining allows to reduce cash engagement when margining derivatives. Investor who buys futures is asked to margin them with some amount of cash (e.g. 20% of position value). Cross margining allows to reduce that amount. For example, if investor bought futures and options the margins are counted not for both positions in isolation, but only for the difference between them (because options protect downside of futures). The same happens in long/short positions. If investor is long on one futures and short on other, his margin in cash will be lower.
Margin is required to manage risks. If the risk is decreased through proper configuration of stock, futures and options, the margin can be lowered. Cross margining takes lower risk into account.
- Gromb, D., & Vayanos, D. (2002). Equilibrium and welfare in markets with financially constrained arbitrageurs. Journal of financial Economics, 66(2-3), 361-407.
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