Gap Risk Assessment

Gap risk assessment is the process of evaluating the potential for an asset price to jump significantly from one level to another without trading at the prices in between. This is particularly relevant for derivatives with barrier triggers or liquidation levels, as a gap can cause the contract to skip the trigger point or execute at a much worse price than expected.

In crypto, gaps are common due to low order book depth and sudden market shocks. Quantitative analysts model these gaps using jump-diffusion processes to estimate the likelihood of such events.

This assessment is critical for setting margin requirements and ensuring that protocol insurance funds are sufficient to cover losses when standard hedging mechanisms fail to execute.