Cega's APYs Explained

How are Cega's APYs calculated and why they fluctuate

Users depositing into Cega vaults generate yield by receiving the premium paid by buyers of the option.

Yield is often expressed by MMs as annualized value called the APR, “Annual Percentage Rate”. It is calculated by taking:

(1) the dollar value of the coupons (i.e. options premium paid to vault users) over 27 days

(2) dividing by the initial investment notional amount

(3) annualizing the percentage (meaning multiplying by approximately 12). Because Cega vaults create compounded returns by rolling over users’ yield and initial investment from month to month, the APY is calculated from the APR to reflect the compounded returns after one year.

What are the factors that impact yield?

The yield of exotic options can be impacted by several factors, including:

  1. Volatility: The level of volatility in the market also affects the yield of exotic options. Options on assets that are more volatile tend to have higher premiums and yields, as the buyer of the option is willing to pay more for the right to buy or sell an underlying asset at a specified price in a potentially volatile market.

  2. Strike price: The strike price of the option also affects the yield. Options with strike prices that are closer to current asset prices tend to have higher premiums and therefore, higher yields. This is because options with higher strike prices are considered to be more likely to be exercised, and as a result, the seller of the option is able to charge a higher premium.

  3. Expiration date: The expiration date of the option also impacts the yield. Options that expire sooner tend to have lower premiums and therefore, lower yields, while options with longer expiration dates tend to have higher premiums and yields. This is because options with longer expiration dates provide the buyer with more time to realize a profit, and as a result, the seller of the option can charge a higher premium.

  4. Expiration exotic features: The expiration date of an exotic option can be complex itself. For example an exotic option can give the opportunity to exercise at any time and date before expiry whereas its distant relative, the vanilla option, can only be exercised once at expiry, making it less expensive and hence providing less chance for high yield.

  5. Complexity of the underlying basket: The more complex the underlying basket is, the more potential for volatility it has, and the higher the yield. For example, an option on the worst performer of a basket will tend to be more volatile that an option on the average of a basket, hence providing more yield.

  6. Credit risk: The risk that a borrower may default on a loan or debt, which can affect the lender’s expected rate of return. Generally, lenders demand a higher APY for higher credit risk borrowers to compensate for the additional risk of default. However, the products offered by Cega do not involve any credit risk from bonds in the structure.

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