Temporal Pricing refers to the dynamic adjustment of an asset’s price or a quote based on the passage of time or specific time-related factors. Its purpose is to account for time-dependent risk, liquidity changes, or impending market events in real-time pricing models for crypto assets.
Mechanism
This mechanism involves algorithms that apply time-decay factors, adjust bid-ask spreads based on proximity to market close or anticipated event triggers, or re-evaluate pricing based on the duration a quote has been outstanding. This is particularly relevant for options pricing, where time to expiry significantly impacts the derivative’s intrinsic and extrinsic value.
Methodology
The strategic approach integrates time as a critical variable in price discovery and risk management, aiming to accurately reflect the eroding value of options or the increasing risk of holding inventory over time. For institutional crypto options trading, this methodology ensures that quotes remain fair and competitive while adequately compensating for time-related market dynamics and potential market shifts.
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