Risk Simulations of Perpetual Contracts on Digital Assets
Perpetual contracts have become a key financial tool in digital asset markets, enabling traders to speculate on asset prices without expiration dates. But what are the risks involved, and how can they be quantified?
Risk Simulations of Perpetual Contracts on Digital Assets
Introduction
Perpetual contracts have become a key financial tool in digital asset markets, enabling traders to speculate on asset prices without expiration dates. But what are the risks involved, and how can they be quantified?
Abstract: This paper delves into the computational aspects of risk management in digital assets, specifically the risk associated with perpetual contracts on digital assets. We begin by integrating perpetual contracts into a general simulation framework, highlighting the two primary variables: the underlying asset price and the basis multiplier. The study presents detailed derivations of risk simulation formulas for perpetual futures, encompassing both linear and inverse contract types. A practical case study is conducted featuring a portfolio strategy that involves a long position in bitcoin coupled with a short position in an inverse perpetual contract on bitcoin. The paper culminates in a comprehensive analysis of the numerical results, focusing on risk and gain metrics, and unveils an asymmetric risk profile inherent in such investment strategies.
Download the full research paper to explore the numerical results and learn more about strategies for managing risk with perpetual futures.
*Note: Cloudwall and the technology behind its Serenity System were acquired by Talos in April 2024. Learn more.
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