Risk management when market making: base pairs & altcoin hedging program

 

Crypto trading is risky. We hedge risk for our clients.

The Problem

Crypto is a hyper volatile market. When clients provide inventory to a market maker they hope the original USDT denominated value can be maintained. Losses on inventory in USDT terms stems from: 

(1) the trading strategies are generating a loss in inventory (this means the number of assets in the inventory drops) & 

(2) the underlying USDT value of the assets in the inventory is depreciating in USDT terms.

Major Coin Hedge Program – Objectives & Implementation

Safeguard the USDT value of BTC, ETH or other major coin inventory provided to Kairon Labs by the Client. Major coin spot inventory position hedging is relatively straightforward in that several crypto derivatives exchanges list perpetual swaps, futures and options on the specific coin itself, for example using a BTC perpetual swap contract to hedge an underlying BTC spot position.  

Altcoin Hedge Program – Objectives & Implementation

Safeguard the USDT value of Altcoin Inventory provided to Kairon Labs by the Client. Where coin-specific derivative hedge instruments (ex. using ETH perpetual swaps contract to hedge an underlying ETH spot position) do not exist for a particular Altcoin then the KL Trading Team leverage their crypto derivatives trading and risk management experience to research alternative solutions which may involve using a coin-specific proxy or a basket index. 

Features common to both Programs

Derivatives are uniquely suited for hedging underlying spot positions due to the flexibility of being able to go long or short. During KL Trading/Client consultation on inventory hedge program suitability, topics including estimated portfolio size, portfolio composition, hedging timeframe (days, weeks, months etc.), hedging style (static vs. dynamic) will be covered. This is followed by documentation issued by Kairon Labs to the Client detailing the agreed hedge strategy. Periodic hedge strategy performance updates will also be provided by Kairon Labs to the Client. With experienced KL Trading staff located globally the Client may rest assured their cryptocurrency portfolio is being optimally hedged 24/7.

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