Custom Derivatives are financial instruments designed to address specific risk exposures or investment objectives that standardized derivatives cannot satisfy. Unlike exchange-traded options or futures, these are bilateral contracts tailored to the precise needs of institutional participants, often involving unique underlying assets, payout structures, or expiration conditions. In crypto, this often extends to novel digital asset combinations or bespoke volatility hedges.
Mechanism
The operational architecture of custom derivatives involves a direct agreement between two parties, typically an institutional client and a specialized dealer. This agreement specifies the terms, conditions, and calculation methodologies, often utilizing smart contracts for transparent execution and settlement in a decentralized context. Price discovery occurs through a request-for-quote (RFQ) process, with risk parameters defined off-chain and settlement on-chain for crypto assets.
Methodology
The creation and management of custom derivatives requires advanced quantitative modeling for pricing and risk assessment, coupled with legal and operational frameworks to define contractual obligations. Strategic deployment aims to isolate and hedge specific, non-standard risks within complex portfolios, or to express highly specific market views on digital assets, thereby optimizing capital efficiency and achieving bespoke exposure that would otherwise be unavailable.
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