Concepts

Learn about the concepts underpinning Theo Network

Margin

Cross-margin

Cross-margin is a margining system that uses the total balance of a trader's account to cover margin requirements across multiple positions or assets. It helps reduce the risk of liquidation by offsetting profits and losses across the portfolio, ensuring sufficient collateral is available to maintain all positions.

Portfolio margin

Portfolio margin is a risk-based margining system used by brokers to determine the required collateral for trading portfolios. It considers the overall risk of the entire portfolio rather than individual positions, allowing for potentially lower margin requirements compared to traditional margin methods. This approach accounts for diversification and offsetting positions to reflect the actual market risk more accurately.

Balance sheet

Prime brokerages allow clients to utilize their balance sheet across multiple asset classes and trading venues. This is facilitated through services like cross-margining and consolidated risk management. By doing so, prime brokerages enable clients to:

1. Offset Risk Across Assets: Positions in different asset classes (e.g., equities, fixed income, derivatives) can offset each other, reducing the overall margin requirements.

2. Enhance Capital Efficiency: Consolidating positions across venues allows clients to better leverage their capital and optimize the collateral needed.

3. Streamline Operations: A single prime broker relationship provides centralized access to multiple markets, trading venues, and clearing systems.

This approach is especially beneficial for institutional clients like hedge funds, allowing them to manage diverse portfolios while maintaining lower costs and greater liquidity.

Transaction Finality

Transaction finality in blockchain refers to the point at which a transaction becomes irreversible and permanently recorded on the blockchain. Once finality is achieved, the transaction cannot be altered, canceled, or removed, ensuring trust and certainty in the system. Finality can be probabilistic (in proof-of-work blockchains, where certainty increases with more block confirmations) or absolute (in proof-of-stake or permissioned blockchains, where consensus guarantees instant irreversibility).

Capital Efficiency

Capital efficiency measures how effectively a user or investment uses its capital to generate returns or achieve its objectives. It reflects the ability to maximize output or profits with the least amount of capital input, highlighting the optimal use of financial resources.

Funding Rates

Funding rates in perpetual swaps are periodic payments exchanged between long and short traders to keep the contract's price close to the underlying asset's price. These rates are determined by the difference between the perpetual price and the spot price and are designed to balance supply and demand in the market.

Carry Trade

A carry trade is a financial strategy where an investor borrows funds in a low-interest-rate currency or asset and invests in a higher-yielding currency or asset, profiting from the interest rate differential.