Funding, Margin, Collateral and Short Selling

A futures hedge can reduce market exposure and still require cash today. A financed bond needs repo funding, and an equity short needs borrowed shares, dividend compensation and fees. This lesson calculates these cash flows and explains how collateral reduces credit exposure while creating liquidity demands.

• evolve a futures margin account through settlement, maintenance breach and variation margin;
• compute cash advanced under a repo haircut and interpret GC vs special repo;
• contrast CSA bilateral collateral with CCP initial/variation margin;
• compute short-sale P&L after dividends and borrow fees;
• explain why collateral reduces credit exposure but creates liquidity risk.

1. Futures variation margin
2. Repo funding
3. OTC collateral and CCPs
4. Short selling
5. Collateral reduces credit risk, creates liquidity risk