Full collateral

Problem

A hedger needs to know the payout exists. Partially collateralised designs depend on future deposits, liquidations or the operator's balance sheet, all of which fail exactly when a currency crisis hits.

Approach

Every contract has a limit (cap), so its maximum payout is known at sale: notional × |cap − strike| / spot. That amount is reserved from free money before the sale completes, and stays locked until settlement.

Why

• A payout can never exceed what is held for it.
• No margin calls, liquidations or credit checks.
• Underwriters' maximum loss is known contract by contract.

Trade-offs

• Capital efficiency. Capital is locked even for contracts unlikely to pay. Return on capital is premium over reserve.
• Limits are mandatory. Unlimited protection is not possible; Open protection uses a pool-set limit.