This involves calculating various risk metrics, such as Value at Risk or Expected Shortfall, across the entire portfolio encompassing spot holdings and derivative positions. Stress testing against extreme market scenarios, particularly relevant in crypto’s high-beta environment, is a necessary component of this analysis. The output quantifies potential capital at risk under defined confidence intervals.
Exposure
Determining the net sensitivity of the portfolio to changes in underlying asset prices, volatility, and time decay is central to this assessment. For options, this requires a comprehensive analysis of the Greeks across all open positions, often across multiple expiration cycles. Understanding the directional and non-directional risk components is key.
Mitigation
Based on the quantified exposure, specific countermeasures are designed and implemented to bring risk within acceptable tolerance levels. This may involve adjusting option delta hedges, reducing leverage in futures positions, or rebalancing collateral across different protocols. A proactive stance on risk reduction is the strategic imperative.
