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  1. 01 Why Have VM?
  2. 02 What is VM?

Why Have VM?

Variation Margin is a term which originates in the exchange traded market. In simple terms it means the change in value of the mark-to-market of a portfolio from one day to the next.

  • Yesterday's portfolio value: 100
  • Today's portfolio value: 105
  • Today's variation margin: +5

The purpose of variation margin is to protect each party from losing the day-to-day profits in a portfolio. Background information is available here on Investopedia.

By requiring each party to post assets to cover VM each day, should one party default, the other will be holding assets equivalent to the profits on a portfolio as of the last posting date. 

In the above example, if the counterparty defaults today, the party in the money would be holding the +5 assets which covers their profits.

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