Variation margin (VM)

Definition

Variation margin (VM) in plain English

When two parties hold a bet-like contract (a derivative), its value shifts every day as prices move — one side is now 'ahead' and the other 'behind.' Variation margin is the daily cash that the losing side hands over to the winning side to settle up that change, so nobody is quietly owed a huge amount that could vanish if they go bust. It's like friends running a tab who square up at the end of each day rather than letting one person's IOU balloon for months. This daily true-up keeps the credit risk small and current instead of letting it pile up dangerously.

Learn these first

• CAPM (Capital Asset Pricing Model)

Related Quantitative Finance terms

• Alpha
• APT (Arbitrage Pricing Theory)
• Arbitrage
• Autocorrelation
• Bachelier model
• Backtesting
• Basis
• Bayes' theorem
• Beta
• Black-Litterman model