Hedging Parameters
Value
- ShortBuffer: 2
Meaning/Justification
- Synthetix short positions need to be collateralized well enough to avoid liquidations during rallies. A buffer of 2 means that shorting 1 ETH at spot price $2000 would require locking $4000 in collateral. Since the borrowed ETH will be sold for its spot price, the effective capital cost of this is equal to $2000.
- At each re-hedge, AMM posts enough collateral to match the buffer value. This buffer is sufficient to sustain a rally of up to 80% happening between re-hedges (since liquidations happen at 1.2), which is a fairly safe value. The buffer can be reduced further as low as 1.6 if urgent liquidity needs arise, assuming that hedges happen frequently enough.
Value
- InteractionDelay: 6 hours (ETH/BTC), 6 hours (other)
Meaning/Justification
- The AMM is required to wait for InteractionDelay hours between each hedge transaction. Longer delay increases AMM risk and P&L uncertainty, while reducing the amount of fees paid to Synthetix.
- A delay of 6-12 hours is reasonable for volatility assets like ETH or BTC. Highly volatile assets need to be hedged more frequently (e.g. 6 hours) as to avoid large losses on tail events. Delay can be further reduced if the AMM proves to have enough fee revenues to cover the hedging costs.
Value
- (50% of pool NAV) / SpotPrice
Meaning/Justification
- HedgeCap denotes the maximum delta (in absolute terms) that the AMM is allowed hedge, above which the exposure will stay unhedged.
- Initially, the cap of 50% of NAV will be imposed to prevent the pool from being over-utilized by hedges, and overpaying Synthetix fees. The cap can be raised or completely lifted when the hedging process proves to be stable and sustainable.
Last modified 8mo ago