A Sensitivities-Based Model is a financial model that quantifies how the value of an asset, portfolio, or derivative changes in response to specific market parameter variations. In crypto, this includes analyzing the impact of changes in underlying asset prices, interest rates, or implied volatilities on digital asset valuations.
Mechanism
A sensitivities-based model operates by applying partial derivatives, often referred to as Greeks in options trading, to measure the exposure of a position to market factors. The mechanism calculates these sensitivities in real-time or near real-time, frequently using numerical methods or analytical formulas, and propagates their impact across a portfolio for aggregate risk assessment.
Methodology
The strategic methodology of deploying a sensitivities-based model allows for precise risk measurement and dynamic hedging in institutional crypto options and derivatives trading. By understanding the delta, gamma, vega, and rho of their positions, traders can construct balanced portfolios, execute dynamic hedges, and manage exposure to market movements, thereby optimizing risk-adjusted returns.
The SIMM aggregation hierarchy reduces margin by systematically netting risks within predefined classes using a standardized correlation framework, enhancing capital efficiency.
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