Neon Costing Model

How we handle premium or cost of buying a hedge

Premium is one of the factors to writing a hedge.

• Premium or cost

• Risk-Free Interest Rate

• Underlying assets value

• Strike Price

• Time to Expiration

Unlike other protocols, our hedging platform is built for OTC trading, as mentioned in previous chapters, hence the premium is not based on the other factors listed above but on pure OTC market rates or prices.

Pricing Options

Call Options and Put Options are supposed to carry a cost or premium when they are written by the seller. The seller sets the desired premium for their hedge based on market trends, there are no limitations to pricing a option on the OTC market. Willing buyer willing seller.

This cost is only chargeable in the paired currency of the underlying assets or tokens in the option.

For instance, if VELA is paired with WETH. The cost of the option is always priced in WETH as that is the paired currency for VELA on DEX.

Pricing Equity Swaps

Equity Swaps in traditional finance

Purpose of cost

A hedge premium or cost is the money which the buyers has to pay to the seller in order to hold rights to exercise the hedge. This is transferred to the seller when a hedge is settled, not when it's bought.

For options this cost is mandatory, option buyer has to pay it to the seller and its not refundable no matter the outcome on the day the option expires. This is the sellers minimum payoff no matter the outcome of an option.

Seller refers to option writer.