How Does a Hard Fork Impact the Valuation of a Cryptocurrency’s Financial Derivatives?
A hard fork introduces extreme uncertainty, which typically causes a sharp increase in implied volatility (IV) for options and a widening of futures contract spreads. The fork creates two assets, potentially splitting the value, forcing exchanges to decide which chain to support for settlement.
This ambiguity makes pricing derivatives highly complex and risky, often leading to a temporary halt in trading.
Glossar
Hard Fork
Disruption ⎊ A hard fork represents a radical divergence in a blockchain’s protocol, creating a permanent split and typically resulting in a new cryptocurrency.
Contentious Hard Fork
Fork ⎊ A contentious hard fork represents a permanent divergence in a cryptocurrency's blockchain, resulting in two separate chains where consensus breaks down regarding protocol changes.
Physical Settlement Derivatives
Contract ⎊ Physical settlement derivatives are financial instruments, such as futures or options, that mandate the actual exchange of the underlying cryptocurrency asset upon the contract's expiration.
Hard Fork Impact
Disruption ⎊ A hard fork represents a fundamental divergence in a cryptocurrency’s blockchain, creating a new version with altered rules; this event introduces systemic risk to derivative valuations predicated on the original chain’s continued functionality, necessitating immediate recalibration of pricing models.