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PROTOCOL

Position closing

Once a position is open, a trader could choose to close it before expiry. If that's the case, the protocol needs to exit the lending position, which at expiry would have represented an amount

$L$

(principal + interest), and repay the owed debt, which at expiry would have represented an amount $D$

(principal + interest).Pricing

The table below presents the price at which a trader could close a long position at a price

$P_{C,L}$

or a short position at a price $P_{C,S}$

(other notations have been introduced in theoretical pricing). Side

Price to close a position

Long

β

$P_{C,L}= \dfrac{S_{S}}{{(1+r_{B,b})}^T} + D \bigg( 1 - \dfrac{1}{{(1+r_{Q,l})}^T} \bigg)$

βShort

β

$P_{C,S}= \dfrac{S_{L}}{{(1+r_{B,l})}^T} + L \bigg( 1 - \dfrac{1}{{(1+r_{Q,b})}^T} \bigg)$

βExample

Let's consider the close of the long and short positions presented in the numerical example in position opening:

- A trader wants to immediately close the long position with an open price$P_{O,L}= 100.59 \: DAI$. Given one could borrow ETH at a yearly fixed rate of$r_{B,b}=3.10\%$β and lend DAI at a yearly fixed rate$r_{Q,l}=9.90\%$, and given the total debt to reimburse at expiry is$D=50.59 \: DAI$, the price at which a trader could immediately close the position is:

β

$P_{C,L}= \dfrac{99.90}{{(1+0.0310)}^{0.25}} + 50.59 * \bigg( 1 - \dfrac{1}{{(1+0.0990)}^{0.25}} \bigg) = 100.32 \:DAI$

β- A trader wants to immediately close the short position with an entry price$P_{O,S} =102.70 \: DAI$. Given one could lend ETH at a yearly fixed rate of$r_{B,l}=2.90\%$β and borrow DAI at a yearly fixed rate$r_{Q,b}=10.10\%$, and given the total money to get back from lending (principal + interest) is$L=152.70 \:DAI$, the price at which a trader could immediately close the position is:

β

$P_{C,S}= \dfrac{100.10}{{(1+0.0290)}^{0.25}} + 152.70 * \bigg( 1 - \dfrac{1}{{(1+0.1010)}^{0.25}} \bigg) = 103.02 \:DAI$

βDemonstration

Long

Let's consider a trader who wants to immediately close a long position of

$1 \:ETH$

(numerical applications rely on the above example):1. The protocol gets back the base currency which was lent,

$\dfrac{1}{{(1+r_{B,b})}^T}$

, i.e. $0.9924 \:ETH$

.2. This base currency is swapped back to the quote currency,

$\dfrac{S_{S}}{{(1+r_{B,b})}^T}$

, i.e. $99.14 \:DAI$

. 3. The protocol buys back the debt

$D$

, today worth $\dfrac{D}{{(1+r_{Q,l})}^T}$

, i.e. $49.41 \: DAI$

.4. For closing the position earlier, the trader will get back money on the debt,

$D - \dfrac{D}{{(1+r_{Q,l})}^T}$

or $D \bigg( 1 - \dfrac{1}{{(1+r_{Q,l})}^T} \bigg)$

, i.e. $1.18 \: DAI$

.5. Hence the money the trader gets back for closing the long position is

$\dfrac{S_{S}}{{(1+r_{B,b})}^T} + D \bigg( 1 - \dfrac{1}{{(1+r_{Q,l})}^T} \bigg)$

, i.e $100.32 \:DAI$

.Short

Let's consider a trader who wants to immediately close a short position of

$1 \:ETH$

(numerical applications rely on the above example):1. The protocol needs

$\dfrac{1}{{(1+r_{B,l})}^T} \: ETH$

to close the debt, i.e. $0.9929 \:ETH$

.2. Hence the protocol needs

$\dfrac{S_{L}}{{(1+r_{B,l})}^T} \: DAI$

to close the debt, i.e. $99.39 \: DAI$

.3. On the other hand, the protocol gets back

$\dfrac{L}{{(1+r_{Q,b})}^T} \: DAI$

from lending, i.e. $149.07 \: DAI$

.4. The money lost in lending for closing the position earlier is

$L-\dfrac{L}{{(1+r_{Q,b})}^T} \: DAI$

or $L \bigg(1-\dfrac{1}{{(1+r_{Q,b})}^T} \bigg) \: DAI$

, i.e. $3.63 \: DAI$

.5. Hence the money the trader gets back for closing the short position is

$\dfrac{S_{L}}{{(1+r_{B,l})}^T} + L \bigg( 1 - \dfrac{1}{{(1+r_{Q,b})}^T} \bigg)$

, i.e. $103.02\:DAI$

.Last modified 2mo ago

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