Welcome to the Term Structure Academy. Our goal is to demystify financial concepts and terminology, making them accessible to all.
Black-Scholes Model & Interest Rates
We now know from our previous blog post how Options are priced using the Black-Scholes model (or more complex iterations). One of the inputs in this model is the interest rate, which is needed to get the right discounting / discount factor. Current Crypto models use Futures / Perp prices to get the risk free rate. Given these prices can fluctuate a lot, option contracts can get mispriced and arbitrageable. In conclusion, having a reliable interest rate is essential for reliable pricing of mor...
Black-Scholes Model & Interest Rates
We now know from our previous blog post how Options are priced using the Black-Scholes model (or more complex iterations). One of the inputs in this model is the interest rate, which is needed to get the right discounting / discount factor. Current Crypto models use Futures / Perp prices to get the risk free rate. Given these prices can fluctuate a lot, option contracts can get mispriced and arbitrageable. In conclusion, having a reliable interest rate is essential for reliable pricing of mor...
Call / Put Options & Black-Scholes Model
Options are financial derivatives that give the holder the right (but not the obligation) to buy or sell an underlying asset at a predetermined price (strike price) within a specified time period. Options are often used for various purposes, including speculation, hedging, and managing risk. They are actively traded in options markets, which are part of the broader derivatives markets. There are two main types of options: call options and put options.Call Option: Gives the holder the right to...
Call / Put Options & Black-Scholes Model
Options are financial derivatives that give the holder the right (but not the obligation) to buy or sell an underlying asset at a predetermined price (strike price) within a specified time period. Options are often used for various purposes, including speculation, hedging, and managing risk. They are actively traded in options markets, which are part of the broader derivatives markets. There are two main types of options: call options and put options.Call Option: Gives the holder the right to...
Trading the Interest Rate Curve
As an interest rate curve (term structure) gets created, traders will be able to take a view of the curve shape. Yield curve dynamics represent a crucial macro variable because they inform us of today’s borrowing conditions and the market's future expectations for growth and inflation. Some examples: An inverted yield curve often leads toward a recession because it chokes real-economy agents off with tight credit conditions (high front-end yields) which are reflected in weak future growt...
Trading the Interest Rate Curve
As an interest rate curve (term structure) gets created, traders will be able to take a view of the curve shape. Yield curve dynamics represent a crucial macro variable because they inform us of today’s borrowing conditions and the market's future expectations for growth and inflation. Some examples: An inverted yield curve often leads toward a recession because it chokes real-economy agents off with tight credit conditions (high front-end yields) which are reflected in weak future growt...
Interest Rate Arbitrage Across De-Fi & Ce-Fi Platforms
Crypto is still a maturing class with liquidity spread across various platforms and products. This will create constant arbitrage opportunities. Traders can monitor the platforms with the right liquidity and engage in arbitrage transactions. Due to our orderbook system, traders can sit on the bid or on the offer to get into and out of trades at a cheap cost. For example, due to supply/demand, market news/developments, etc. USDC rate is significantly higher than USDT. In this case, traders / m...
Interest Rate Arbitrage Across De-Fi & Ce-Fi Platforms
Crypto is still a maturing class with liquidity spread across various platforms and products. This will create constant arbitrage opportunities. Traders can monitor the platforms with the right liquidity and engage in arbitrage transactions. Due to our orderbook system, traders can sit on the bid or on the offer to get into and out of trades at a cheap cost. For example, due to supply/demand, market news/developments, etc. USDC rate is significantly higher than USDT. In this case, traders / m...
What is an Arbitrage Trade?
Interest rate arbitrage refers to a financial strategy where an investor takes advantage of interest rate differentials between two or more financial instruments or markets to make a profit with minimal risk. This type of arbitrage capitalizes on discrepancies in interest rates, which can arise due to various factors such as market inefficiencies, changes in economic conditions, or differences in credit risk. The basic idea behind interest rate arbitrage is to borrow at a lower interest rate ...
What is an Arbitrage Trade?
Interest rate arbitrage refers to a financial strategy where an investor takes advantage of interest rate differentials between two or more financial instruments or markets to make a profit with minimal risk. This type of arbitrage capitalizes on discrepancies in interest rates, which can arise due to various factors such as market inefficiencies, changes in economic conditions, or differences in credit risk. The basic idea behind interest rate arbitrage is to borrow at a lower interest rate ...
