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Payoff scenarios

Bond + Options Vaults

Summary

Investors make money by accruing high APY daily yield payments on their deposited capital.
The accrued yield is paid at the expiry of the 27 day trade regardless of the performance of the markets. Yield comes directly from the options premium paid by market makers who are buying the options as a way to hedge their books, akin to insurance.
At FCN expiry/maturity, investors also receive their initial deposit (aka "principal") back. Note that deposited funds are only partially lent out (80% lent, 20% remain in the Cega smart contract as collateral). The amount of principal returned upon expiry is linked to the performance of the FCN's underlying crypto assets (see examples below)
An investor's total investment payoff (yield paid / principal invested) from the FCN varies based on market performance at the end of the 27 day trade. Below we illustrate the investor's payoff in key scenarios.

Example Scenarios

Quick links:
For each scenario below, assume the following:
$1000 initial investment in FCN vault (aka "principal")
FCN terms:
  1. 1.
    27 day investment duration
  2. 2.
    Two underlying crypto assets = ETH, SOL
  3. 3.
    300% APY (compounded annual yield)
    • = ~150% APR (non-compounding annual yield)
    • = 12.5% yield every month (150% / 12 months)
    • = 0.46% yield every day (12.5% / 27 days)
    • = $4.60 yield per day (0.46% * $1000 deposit)
  4. 4.
    Knock-in (KI) barrier level is 50%
Additionally, when we talk about the price movement of underlying crypto assets we do so in relative percentage terms, not absolute terms. This allows us to easily compare the performance of different assets.
Note: FCN relative price changes are measured against the initial price of the asset when the vault started (1am UTC on the vault start date for each vault).
Exhibit 1: Solana and Ethereum prices in absolute terms.
Exhibit 2: Solana and Ethereum prices in relative percentage terms vs. initial Oct 11 price.

Scenario 1 - Normal expiry, closing spot above 100%

What were the price movements of the underlying crypto assets?
  • ETH prices ended 10% higher than when the vault started, closing at 110% of initial spot price
  • SOL prices ended 1% higher than when the vault started, closing at 101% of initial spot price
  • None of the assets fell below the Knock-in (KI) Barrier at 50% at any time during the 27 days
What happens to the investor in this example scenario?
  • No knock-in (KI) event occurs therefore the FCN reaches its full 27 day duration and expires as normal. Because of no KI, the full principal that was deposited by the user is returned to them.
Scenario 1 - Normal expiry, closing spot above
What is the payoff for the investor?
  • Yield = daily yield for all 27 days = $4.60 * 27 = $124.2 yield
  • Principal = $1000 returned
  • Total payoff = $1,124.2 after 27 days
  • ROI = $1124.2/$1000 = 12.42% yield in 27 days

Scenario 2 - Normal expiry, closing spot below 100%

What were the price movements of the underlying crypto assets?
  • SOL prices tank down 36% vs. when the vault started, closing at 64% of initial spot price
  • ETH prices tank down 13% vs. when the vault started, closing at 87% of initial spot price
  • None of the assets fell below the Knock-in (KI) Barrier at 50% at any time during the 27 days
What happens in this example scenario?
  • No knock-in (KI) event occurs therefore the FCN reaches its full 27 day duration and expires as normal. Because of no KI, the full principal that was deposited by the user is returned to them.
Scenario 2 - Normal expiry, closing spot below 100%
What is the payoff for the investor?
  • Yield = daily yield for all 27 days = $4.60 * 27 = $124.2 yield
  • Principal = $1000 returned
  • Total payoff = $1,124.2 after 27 days
  • ROI = $1126/$1000 = 12.42% yield in 27 days
In short, investors continue to earn high daily yield payments despite the negative performance of both SOL and ETH. There is no impact to the investor's principal deposited.

Scenario 3 - Knock-in event

What happens in this example scenario?
  • On Jan 23, 2022, before the vault trade reaches maturity ...
    • SOL prices (yellow line) have decreased 52% by this point since the start of the trade. This exceeds the 50% KI barrier level which means that this trade has "knocked-in"
    • The knock-in event does not cause vaults to expire immediately. It marks the vault as having been knocked-in and causes the principal returned upon expiry to use the knock-in formula which means there is some loss to principal
Scenario 3
What is the payoff for the investor?
Because this vault has experienced a knock-in event during its lifetime, the principal returned when the vault expires is calculated using a formula based on the worst-performing asset on the final day.
Upon expiry, we see that SOL (end at 48% of starting price) is the worst performing vs. ETH (ends at 60% of starting price).
  • Yield = daily yield for all 27 days = $4.60 * 27 = $124.2 yield
  • Principal = $1000 initial deposit * min(100%,48%) = $1000 * 48% = $480 returned
  • Total payoff = $604.2 after 27 days
  • ROI = $604.2/$1000 = -39.6% return
    • Note: even in this worst case scenario, the investor's losses are better than if they invested in SOL or ETH directly when comparing -39.6% return vs. -52% loss (SOL) and -40% loss (ETH). This is because losses are offset by the high daily yield which is paid regardless of market conditions -- and this safety feature also makes FCNs attractive for investors.

Scenario 4 - Knock-in event, closing spot above KI

What happens in this example scenario?
  • Knock-in (KI) event occurs on Apr 8
    • On this day, SOL prices have decreased 58% in total and are now at 42% of its initial price when the vault started. This exceeds the 50% KI barrier level
    • The knock-in event does not cause vaults to expire immediately. It marks the vault as having been knocked-in which means that when the vault expires the knock-in formula will be used to calculate total principal returned to the investor.
    • On Apr 23 when the vault expires, ETH is the worst performing asset having fallen 40% to end at 60% of original spot price, while SOL only fell 30% to end at 70% of the original spot price.
Scenario 4
What is the payoff for the investor?
Because this vault has experienced a knock-in event during its lifetime, the principal returned when the vault expires is calculated using a formula based on the worst-performing asset on the final day.
Even though SOL hit KI during the cycle, ETH was the worst performing asset on the final day. On Day 30, we see that ETH (60%) is the worst performing vs. SOL (70%).
  • Yield = daily yield for all 27 days = $4.20 * 27 = $113.4 yield
  • Principal = $1000 initial deposit * min(100%,60%) = $1000 * 60% = $600 returned
  • Total payoff = $713.4 after 27 days
  • ROI = $713.4/$1000 = -28.6% return