Risk management for risk takers

May 2, 2024

Position Replication Risk (PRR) occurs when an investor has an expectation of how a position will perform – either as part of a hedged position or as a portfolio allocation decision – but loses that position when their counterparty defaults. To be flat in a hedged construct, or to replicate the position they had on previously, they now must go into the market and replicate the position previously had.

April 23, 2024

Credit risk correlation, when the default of one entity increases the probability that another will default, is often overlooked in crypto risk management. These correlations can be direct, as was the case with Voyager, or indirect, so called third cause correlation. An example of the latter also occurred in 2022 when Vauld and Celsius were both taken down by Luna’s collapse and the subsequent market volatility--the third cause. While this inter-relationship doesn’t affect expected losses, it does impact the distribution of losses and thereby risk exposure and capital requirements.

April 12, 2024

“What goes up, must come down,” is the saying. “What goes up and never comes down,” is the riddle. As BTC and other digital asset valuations have climbed over the past few months, the capital cushions of market makers has risen, and their leverage has fallen. Yet this month, Agio’s aggregate industry default risk is essentially flat, if not gently rising. What gives? It’s all about the chances of going up and down.