Collateral and utilisation
Collateral requirement
Each contract must be fully collateralised by underwriters' capital when it is sold:
The reserve is the notional multiplied by the distance between the strike and the limit, divided by the rate at purchase.
This equals the contract's maximum gross payout. No contract is sold on credit.
| Example | Reserve |
|---|---|
| Limited: 10,000 notional, strike 1,360, limit 1,500, rate 1,330 | 1,052.63 USDC |
| Open 30%: 10,000 notional, strike 1,360, rate 1,330 | 3,000.00 USDC |
The reserve per dollar of notional is the limit distance divided by today's rate. A wider limit reserves more capital and costs more.
Capacity
Capacity is the free capital of the underwriters backing new sales, less any amount they have asked to withdraw.
A contract is sold only if its reserve is no more than the capacity of underwriters who accept its tenor.
Utilisation
Utilisation is the share of the pool's capital that is reserved: reserved capital divided by reserved and free capital together.
| Example pool after the sale | Free | Reserved | Utilisation |
|---|---|---|---|
| 10,000 deposited, one contract sold | 9,144.59 | 1,052.63 | 10.3% |
Free capital is the 10,000 deposited, less the 1,052.63 reserved, plus the 197.225 premium credited at the sale.
Return on capital
An underwriter's premium per contract relative to the capital it locks is:
Your premium return on a contract is the premium you received divided by the capital you reserved for it.
In the example, 197.23 / 1,052.63 = 18.7% for a 30-day contract, before any payout. Whether that is profitable depends on how often and how far the rate settles past the strike.