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Collateralization ratio Meaning

The collateralization ratio measures the relationship between the value of collateral pledged and the value of the associated debt or obligation. It is calculated by dividing the collateral’s market value by the loan amount. A ratio greater than one indicates that the collateral is worth more than the loan, providing a buffer against default; a lower ratio means less protection.

Lenders set minimum collateralization ratios to manage credit risk. In traditional finance, mortgages and margin accounts require borrowers to maintain certain ratios, while in decentralized finance, smart contracts automatically enforce collateral requirements. If the ratio falls below a maintenance level, the borrower may be required to add collateral or face liquidation.

Monitoring collateralization ratios helps lenders and borrowers make informed decisions about leverage and exposure. Higher ratios give lenders more security but reduce capital efficiency for borrowers. The optimal ratio balances risk and opportunity.

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Important Disclaimer:

Finery Markets BVI Limited (“Finery Markets”) provides software, technology infrastructure, and related Information and Communication Technology (ICT) services on a Software-as-a-Service (“SaaS”) basis. Finery Markets acts solely as a software vendor and does not operate a trading platform, does not intermediate, match, execute, clear, or settle transactions, and does not engage in any activities that would require regulatory authorisation under applicable laws.

Finery Markets’ software is non-custodial and is provided exclusively to licensed institutional entities that act as independent operators of their own environments. All counterparties are solely responsible for establishing and maintaining their own bilateral trading and settlement relationships. Finery Markets is not a party to any such arrangements and assumes no responsibility for the conduct, verification, or compliance obligations of any users of the software.

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