Contango v1
  • Basics
    • 💃What is Contango?
    • 🤔What are expirables?
    • 📅Why expirables?
    • 💰Use cases
  • PROTOCOL
    • 🤯Theoretical pricing
    • ⚙️How it works
    • 🤓Protocol pricing
      • Position opening
      • Position closing
      • Price improvement
    • 🔁Borrowing and lending
      • Yield protocol
      • Notional
    • 🎛️Equity management
    • 📋Types of contracts
    • 🤝Delivery
    • 🪙Tokenomics
    • ⚠️Risks
    • 📖Tutorials
  • Resources
    • 👌Official links
    • 📑Contracts
    • 👨‍🏫Educational links
    • 📖Glossary
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On this page
  • Long position
  • Add equity
  • Remove equity
  • Short Position
  • Add equity
  • Remove equity
  1. PROTOCOL

Equity management

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Last updated 2 years ago

Once a position has been opened, a trader can add or remove equity. Equity is the sum between the initial margin and a trader's P&L. The table below summarises the impact of each action on the long and short positions.

Long position
Short position

Add equity

Remove money from the borrowing position, i.e. the trader could recover part of the interest paid in advance

Add money to the lending position, i.e. the trader will get extra income

Remove equity

Add money to the borrowing position, i.e. the trader will pay the interest on the removed equity amount

Remove money from the lending position, i.e. the trader will get less income from the lent amount

The following examples do take into account potential liquidation for low collaterisation ratios. They are indicative to better understand the impact of equity management.

In this section, the collatisation ratio for borrowing CRborrowCR_{borrow}CRborrow​ refers to the one on the underlying borrowing protocol and not on the expirabel position itself.

Long position

Below we will consider the numerical example of a long position opened in where:

  • SL=100.10 DAIS_{L}=100.10 \: DAISL​=100.10DAI

  • the trader has posted 50 DAI50 \:DAI50DAI as margin

  • the price to open the long position is PO,L=100.59 DAIP_{O,L} = 100.59 \: DAIPO,L​=100.59DAI

  • 0.9929 ETH0.9929 \: ETH0.9929ETHhave been lent, i.e. the equivalent of 0.9929∗99.90=99.19 DAI0.9929 *99.90 = 99.19\:DAI0.9929∗99.90=99.19DAI

  • the debt (principal + interest) is D=50.59 DAID=50.59 \: DAID=50.59DAI.

Remembering the concept of flash swaps used in the protocol (see the section), where the zero-coupon bond for lending ETHETHETH is used as collateral to borrow DAIDAIDAI, we find a collaterisation ratio for borrowing of CRborrow=99.1950.50=196.07%CR_{borrow}=\dfrac{99.19}{50.50}=196.07 \% CRborrow​=50.5099.19​=196.07%.

Add equity

When equity is added to a position, it is used to repay earlier some debt and hence increase the collaterisation ratio for borrowing CRborrowCR_{borrow}CRborrow​ of the borrowed DAIDAIDAI. Taking the example of the long position which has been opened, and supposing that the spot price remains the same, let's say a trader wants to add 20 DAI20 \:DAI20DAI at T=0.2T=0.2T=0.2 when rQ,l=9%r_{Q,l}=9\%rQ,l​=9%:

  • the debt recovered is 20∗(1+0.09)0.2=20.35 DAI20*{(1+0.09)}^{0.2}=20.35\:DAI20∗(1+0.09)0.2=20.35DAI

  • The remaining debt is D=50.59−20=30.24 DAID=50.59-20=30.24\: DAID=50.59−20=30.24DAI

  • and the new collaterisation ratio for borrowing would be CRborrow=99.1930.24=327.99%CR_{borrow}=\dfrac{99.19}{30.24}=327.99\%CRborrow​=30.2499.19​=327.99%.

Remove equity

Since the initial posted DAIDAIDAIwas used to buy the required ETHETHETH, this equity is no more available and a trader cannot simply withdraw it. Hence, if a trader wants to remove some equity to decrease the collaterisation ratio CRborrowCR_{borrow}CRborrow​, the protocol will simply borrow the required DAIDAIDAI directly at a fixed rate on an underlying fixed rate protocol. Taking the example of the long position which has been opened, and supposing that the spot price remains the same, let's say a trader wants to remove 10 DAI10 \:DAI10DAI at T=0.2T=0.2T=0.2 when rQ,b=10%r_{Q,b}=10\%rQ,b​=10%:

  • the extra debt (principal + interest) is 10∗(1+0.1)0.2=10.19 DAI10*{(1+0.1)}^{0.2}=10.19\:DAI10∗(1+0.1)0.2=10.19DAI

  • the total debt will become D=50.59+10.19=60.78 DAID=50.59+10.19=60.78\: DAID=50.59+10.19=60.78DAI

  • and the new collaterisation ratio for borrowing would be CRborrow=99.1960.78=163.19%CR_{borrow}=\dfrac{99.19}{60.78}=163.19\%CRborrow​=60.7899.19​=163.19%.

The mechanism used in Contango to remove equity implies that a trader can remove an amount of equity higher than the initial posted margin. This allows a trader to get out some equity, or crystallise the P&L, without having to partially close a position.

Short Position

  • SS=99.90 DAIS_{S}=99.90 \: DAISS​=99.90DAI

  • the trader has posted 50 DAI50 \:DAI50DAI as margin

  • the price to open the short position is PO,S=102.70 DAIP_{O,S} = 102.70 \: DAIPO,S​=102.70DAI

  • 0.9924 ETH0.9924\: ETH0.9924ETH have been borrowed, i.e. the equivalent of 0.9924∗99.90=99.14 DAI0.9924*99.90 = 99.14 \:DAI0.9924∗99.90=99.14DAI

  • the lent amount (principal + interest) is L=152.70 DAIL=152.70 \: DAIL=152.70DAI.

Add equity

Adding equity is equivalent to lend more DAIDAIDAI, i.e. add more collateral for the debt and increase the collaterisation ratio. Taking the example of adding 30 DAI30 \:DAI30DAI at T=0.2T=0.2T=0.2 when rQ,l=9%r_{Q,l}=9\%rQ,l​=9%:

  • the new lent amount at expiry (principal + interest) is 30∗(1+0.09)0.2=30.52 DAI30*{(1+0.09)}^{0.2}=30.52\:DAI30∗(1+0.09)0.2=30.52DAI

  • the total lent amount is now L=152.70+30.52=183.22 DAIL=152.70+30.52=183.22\:DAIL=152.70+30.52=183.22DAI

  • and the new collaterisation ratio for borrowing would be CRborrow=183.2299.14=184.81%CR_{borrow}=\dfrac{183.22}{99.14}=184.81\%CRborrow​=99.14183.22​=184.81%.

Remove equity

Removing equity is equivalent to remove money from the lending position. Taking the example of removing 10 DAI10 \:DAI10DAI at T=0.2T=0.2T=0.2 when rQ,b=10%r_{Q,b}=10\%rQ,b​=10%:

  • the lent amount to remove (principal + interest) is 50∗(10+0.1)0.2=10.19 DAI50*{(10+0.1)}^{0.2}=10.19\:DAI50∗(10+0.1)0.2=10.19DAI

  • the remaining total amount is L=152.70−10.19=142.51 DAIL=152.70-10.19=142.51\:DAIL=152.70−10.19=142.51DAI

  • and the new collaterisation ratio for borrowing would be CRborrow=142.5199.14=143.74%CR_{borrow}=\dfrac{142.51}{99.14}=143.74\%CRborrow​=99.14142.51​=143.74%.

Below we will consider the numerical example of a short position opened in where:

Remembering the concept of flash swaps used in the protocol (see the section), where the zero-coupon bond for lending DAIDAIDAI is used as collateral to borrow ETHETHETH, we find a collaterisation ratio for borrowing of CRborrow=152.7099.14=154.02%CR_{borrow}=\dfrac{152.70}{99.14}=154.02 \% CRborrow​=99.14152.70​=154.02%.

🎛️
position opening
borrowing and lending
position opening
borrowing and lending