An obligation or security linked to another obligation or security to secure its performance. For example, an option writer may deposit with his bank or brokercommon stock in the company on which an option is written as collateral to guarantee performance on the option. He may also deposit securities convertible into the underlying stock or completely unrelated securities with an appropriate market value. Collateral is also posted as a performance bond to guarantee performance on listed futures contracts and on various over-the-counter contracts.
For a thorough discussion of collateral and credit risk, click "Key Risk Concepts: Credit Risk"