Time to Manage Your Risk

05 February 2021

Valuation and Risk Analysis of Cryptocurrency Options

Crypto Currencies have received a great deal of attention recently, mostly due to Bitcoin's impressive rally over the last few months. As the global crypto market gains wider acceptance, investors and speculators alike are increasingly trading derivatives in order to both manage risk and gain exposure to crypto currency volatility.

Currently, several global venues now offer futures contracts, allowing traders to establish both long and short linear exposure to Bitcoin (such as the CME and ICE futures exchanges) without having to physically posses or deal in the currency in question, as these contracts cash-settle in traditional currencies. Such exchanges now also offer options on futures, providing market participants with non-linear hedging and speculation alternatives as well. Internationally, venues exist for direct crypto currency options that both trade and settle in the reference crytpo coin rate (such as Bit.com and Derebit). A trader could therefore establish a purely crypto-currency option hedging position, unexposed to any standard currency rate.

Independent valuation and analysis of such positions is crucial, as portfolio managers may hold direct crypto currencies, options, and futures, across several venues, making a single, unified view of portfolio risk all the more necessary.

The RiskAPI system provides users with valuation and analysis of spot crypto currencies, futures, options on futures, as well as direct options on crytpo currencies. Using the system's options on currencies notation, the example below shows a range of strikes for some near-term call options along with their associated risk and valuation measures:



The symbols in the example above leverage a formulaic symbol format within RiskAPI allowing users to specify individual option terms as well as underlying currency exchange rates (in this case USDBTC). The set of calculations provide for both point-in-time valuation, as well as statistical analysis of simulated (or historical) returns, depending on the VaR model chosen (in this case Monte Carlo)



For derivatives settling purely in BTC (and others), the ability to change the calculation base currency allows for views of exposure purely in the crypto currency of choice. In the above example, the same call options are stressed under a multi-dimensional spot and implied volatility shock, with the results (Stress Impact) shown in Bitcoin, with no USD exposure or value involved.