Free lesson · Crypto derivatives

Collateral depegs and wrong-way exposure

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Collateral can lose value at the same time the derivative needs more margin. A flat hedge in the underlying does not hedge its settlement asset.

Translate collateral units into dollars and apply eligibility haircuts. Distinguish exchange margin value from the price at which the collateral could actually be sold.

If stablecoin value falls or a collateral asset is correlated with the traded market, available protection can shrink during stress. Model the same price path jointly rather than applying independent average shocks.

Apply it in a strategy

• Stress stablecoin-settled and coin-collateralized derivative accounts jointly with market moves.
• Record the input timestamp, executable quantity, currency and horizon. Reconcile the result with a cash-flow or state table.
• Stress this failure condition: Eligibility can be suspended entirely and reported haircut rules can change during a liquidity event.

Research deliverable

Build and explain a collateral depegs and wrong-way exposure worksheet. Stress stablecoin-settled and coin-collateralized derivative accounts jointly with market moves.

Evidence boundary: Synthetic arithmetic and scenarios illustrate mechanics. They are not historical returns, a paper replication, or evidence of an executable edge. Research sources and their access limitations are recorded at the end of this module.

# Python 3.10+; standard library unless NumPy is imported below.
# Inputs and outputs use the units defined in this lesson. Synthetic teaching example.
def eligible_collateral(units,price,haircut):
    if min(units,price)<0 or not 0<=haircut<=1: raise ValueError("Invalid collateral")
    return units*price*(1-haircut)

print(eligible_collateral(10000,.90,.10))