Risk-Neutral Discounting for Crypto
This paper introduces risk-neutral discounting approaches for pricing options on digital assets. By comparing discount rates from futures and options prices, we offer an analysis to help enhance the risk management and pricing of crypto derivatives.
Risk-Neutral Discounting for Crypto
Introduction
This paper introduces risk-neutral discounting approaches for pricing options on digital assets. By comparing discount rates from futures and options prices, we offer an analysis to help enhance the risk management and pricing of crypto derivatives.
Abstract: We review various approaches to risk-neutral discounting for options on cryptocurrencies. In particular, we examine sources of crypto lending rates as well as benchmark indices constructed to represent a risk-free rate of return for crypto markets. We compare these rates with the discount rates implied from future and option prices on Deribit. In order to price European options traded on Deribit in the context of risk-neutral evaluation, we have to choose which discount curve to use. In traditional finance, one constructs a discount curve from liquidly-traded instruments whose yield represents, in some sense, a risk-neutral rate of return. We seek an analogous approach from crypto derivatives.
Download the full paper to understand the pros and cons of the different approaches we analyzed.
*Note: Cloudwall and the technology behind its Serenity System were acquired by Talos in April 2024. Learn more.
Latest insights and research
.png)
Request a demo
Find out how Talos can simplify the way you interact with the digital asset markets.