How Do Options Contracts Allow for the Hedging of Stablecoin Collateral Risk?
Options can hedge collateral risk by allowing a user to buy a put option on their collateral asset (e.g. Ether).
If the price of Ether drops, the value of the put option increases, offsetting the loss in the collateral's value. This allows the user to protect their collateralized debt position from liquidation without having to add more collateral or close the position.
Glossar
Stablecoin Collateral
Foundation ⎊ Stablecoin collateral refers to the underlying assets held in reserve to back the value of a stablecoin, ensuring its peg to a fiat currency or another stable asset.
Options Contracts
Derivative Instruments ⎊ Options Contracts are agreements granting the holder the right, but not the obligation, to buy or sell a specified quantity of an underlying asset, typically a cryptocurrency, at a fixed price within a set timeframe.