Losses
You lose money when a contract you back pays out more than the premium you received for it.
How a payout is charged
At settlement, the contract's payout is charged only to its backers, in proportion to their reserve:
Your share of a payout is the payout multiplied by your share of the contract's reserve.
Your reserve minus your share returns to your free money.
Example
The contract above settles at 1,420. The payout is 451.13 USDC.
| Underwriter 1 | Underwriter 2 | |
|---|---|---|
| Reserve | 421.05 | 631.58 |
| Share of the payout | 180.45 | 270.68 |
| Returned to free money | 240.60 | 360.90 |
| Premium received at sale | 78.89 | 118.33 |
| Result on this contract | −101.56 | −152.34 |
Had the rate settled at or below the strike of 1,360, nothing would be paid, the full reserves would return, and each would keep the premium.
Most you can lose
On one contract, at most your reserve for it. Across a pool, at most everything you have reserved. You are never asked for more money.
What drives losses
- Large currency moves past the strikes of the contracts you back.
- Concentration: many contracts in one pair, direction and expiry week settle on the same rate.
- Price: a pool whose markup is too low collects too little premium for the risk. See Pricing model.