Derivatives and Clearinghouses
- Risk Management
The derivatives notes frame a contract as a way to move or reshape risk. Futures and standardized options trade through a clearinghouse, while bilateral contracts expose each party to counterparty risk.
Central counterparties reduce bilateral connections by becoming the buyer to every seller and the seller to every buyer. That changes the network of exposures; it does not make risk disappear. Margin, default funds, collateral, and close-out rules determine how losses are absorbed when a member fails.
The class uses the Robinhood and clearinghouse discussion to connect market structure with risk measurement. A position's payoff, collateral terms, liquidity, and legal netting set all belong in the exposure analysis.