Abstract
Over 90% of exchange trading on crypto options has always been on the Deribit platform. This centralized crypto exchange only lists inverse products because they do not accept fiat currency. Likewise, other major crypto options platforms only list crypto–stablecoin trading pairs in so-called direct options, which are similar to the standard crypto options listed by the CME except the US dollar is replaced by a stablecoin version. Until now a clear mathematical exposition of these products has been lacking. We discuss the sources of market incompleteness in direct and inverse options and compare their pricing and hedging characteristics. Then we discuss the useful applications of currency protected “quanto” direct and inverse options for fiat-based traders and describe their pricing and hedging characteristics, all in the Black–Scholes setting.
| Original language | English |
|---|---|
| Pages (from-to) | 1005-1043 |
| Number of pages | 39 |
| Journal | Mathematical Finance |
| Volume | 33 |
| Issue number | 4 |
| Early online date | 11 Jul 2023 |
| DOIs | |
| Publication status | Published - Oct 2023 |
Bibliographical note
Funding Information:The authors have nothing to report.
Publisher Copyright:
© 2023 The Authors. Mathematical Finance published by Wiley Periodicals LLC.
Keywords
- cryptocurrency
- foreign exchange
- hedging
- incomplete market
- inverse option
ASJC Scopus subject areas
- Accounting
- Finance
- Social Sciences (miscellaneous)
- Economics and Econometrics
- Applied Mathematics