How Does Residual Consensus Risk Affect the Hedging Cost for Derivatives Issuers?
Residual consensus risk, the small but non-zero chance of a security breach or chain re-organization, increases the hedging cost for derivatives issuers. Issuers must price this risk into the contracts they offer.
The higher the perceived risk of the underlying asset's network failing, the more expensive it becomes to hedge against potential price volatility or contract failure. This translates to higher premiums for options and futures.
Glossar
Residual Consensus Risk
Agreement ⎊ Residual Consensus Risk, within cryptocurrency derivatives and options trading, represents the potential for divergence between the market’s collective assessment of an asset’s future value and the actual outcome, particularly when relying on decentralized consensus mechanisms.
Hedging Cost
Cost ⎊ The total expenditure associated with implementing a hedging strategy across cryptocurrency derivatives, options, and related financial instruments represents a critical consideration for risk mitigation.