Portfolio Solvency

Portfolio solvency refers to the state of a trader's or an entity's account where the total value of assets held is sufficient to cover all liabilities and margin requirements. Maintaining solvency is the primary goal of risk management in derivatives trading.

A portfolio becomes insolvent when its net value falls below zero or when it fails to meet the maintenance margin requirements set by the exchange or protocol. In the event of insolvency, the account must be liquidated to prevent further losses to the system.

Achieving and monitoring portfolio solvency involves real-time tracking of asset values, liability obligations, and the impact of potential market moves on the overall position. For institutions, this includes rigorous stress testing and scenario analysis to ensure that they can remain solvent even under extreme market conditions.