In this Element the authors review the technique of the change of numeraire in the martingale approach to option pricing. Their intention is to present a reader friendly explanation of the technique itself, and illustrate how it is applied in various fields of quantitative finance as the basis...

We propose a counter-cyclical initial margin model for option portfolios. Our model explores the intrinsic netting within a given portfolio of European options and outputs a constant upper bound of the maximum possible loss. This feature would allow option clearinghouses and regulators to gauge...

Margin requirements for derivative contracts serve as a buffer against the transmission of losses through the financial system by protecting one party to a contract against default by the other party. However, if margin levels are proportional to volatility, then a spike in volatility leads to...