Expiry Duration, within the context of crypto derivatives, specifically options and futures contracts, refers to the remaining time until the contract reaches its expiration date. This temporal metric critically influences the value of these derivatives, as it dictates the period over which the underlying asset’s price can move favorably. Its primary purpose is to define the finite lifespan of a derivative, impacting pricing models, risk assessment, and trading strategies.
Mechanism
The system mechanism for tracking expiry duration involves precise timestamping of contract initiation and a scheduled, immutable expiration time recorded within the contract’s parameters. Trading platforms continuously calculate the time to expiry, updating this value in real-time. For physically settled contracts, the mechanism triggers asset delivery; for cash-settled contracts, it initiates the final price calculation and cash transfer based on predefined rules, often using a reliable oracle for final settlement price determination.
Methodology
The methodology for considering expiry duration is fundamental to options pricing theory, where longer durations generally imply higher extrinsic value due to increased time for price movement. Traders strategically select contracts with varying expiry durations to align with their market outlook and risk tolerance, employing strategies such as calendar spreads or vertical spreads. Risk management involves monitoring the decay of time value as expiry approaches, necessitating adjustments to hedge positions or roll contracts forward to maintain desired market exposure.
The RFQ expiry duration dictates the provider's uncompensated risk, creating a direct correlation with rejection rates as a defense against adverse selection.
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