Contango Exchange (external doc)

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BASICS

Equity management
Equity management

Once a position has been opened, a trader can add or remove equity. Equity is the sum between the initial collateral and a trader's P&L. The table below summarises the impact of each action on the long and short positions.

Side

Add equity

Remove equity

Long

Remove money from the borrowing position, i.e. the trader could recover part of the interest paid in advance

Add money to the borrowing position, i.e. the trader will pay the interest on the removed equity amount

Short position

Add money to the lending position, i.e. the trader will get extra income

Remove money from the lending position, i.e. the trader will get less income from the lent amount

⚠️ The following examples do take into account potential liquidation for low collaterisation ratios. They are indicative to better understand the impact of collateral management.

⚠️ In this section, the collatisation ratio for borrowing
⁠
refers to the one on the underlying borrowing protocol and not on the futures position itself.

Long position

Below we will consider the numerical example of a long position in

Position opening⁠

where:

⁠

the trader has posted

⁠

as collateral

the price to open the long position is

⁠

have been lent, i.e. the equivalent of

⁠

the debt (principal + interest) is

⁠

Remembering the concept of flash swaps mentioned in

Borrowing and lending⁠

, where the zero-coupon bond for lending ETH is used as collateral to borrow DAI, we find a collaterisation ratio for borrowing of

⁠

Add equity

When equity is added to a position, it is used to repay earlier some debt and hence increase the collaterisation ratio for borrowing

⁠

of the borrowed DAI. Taking the example of the long position which has been opened, let's say a trader wants to remove

⁠

when

⁠

The new debt (principal + interest) is:

⁠

The remaining debt is:

⁠

And the new collaterisation ratio for borrowing would be:

⁠

Remove equity

Since the initial posted DAI were used to buy the required ETH, this equity is no more available and a trader cannot simply withdraw it. Hence, if a trader wants to remove some equity to decrease the collaterisation ratio for borrowing

⁠

, the protocol will simply borrow the required DAI directly at a fixed rate on an underlying fixed rate protocol. Taking the example of the long position which has been opened, let's say a trader wants to remove

⁠

when

⁠

the extra debt (principal + interest) is:

⁠

the total debt will become:

⁠

and the new collaterisation ratio for borrowing would be:

⁠

The mechanism used in Contango to remove equity implies that a trader can remove an amount of equity higher than the initial posted collateral. This allows a trader to get out some equity, or crystallise the P&L, without having to partially close a position.

Short position

Below we will consider the numerical example of a short position in

Position opening⁠

where:

⁠

the trader has posted

⁠

as collateral

the price to open the long position is

⁠

have been borrowed, i.e. the equivalent of

⁠

the lent amount (principal + interest) is

⁠

Remembering the concept of flash swaps used in the protocol (see

Borrowing and lending⁠

), where the zero-coupon bond for lending DAI is used as collateral to borrow ETH, we find a collaterisation ratio for borrowing of:

⁠

Add equity

Adding equity is equivalent to lend more DAI, i.e. add more collateral for the debt and increase the collaterisation ratio. Taking the example of adding

⁠

when

⁠

the new lent amount at expiry (principal + interest) is:

⁠

the total lent amount is now:

⁠

and the new collaterisation ratio for borrowing would be:

⁠

Remove equity

Removing equity is equivalent to remove money from the lending position. Taking the example of removing

⁠

when

⁠

the lent amount to remove (principal + interest) is:

⁠

the remaining total amount is:

⁠

and the new collaterisation ratio for borrowing would be:

⁠

Contango uses isolated margin on each position. E.g. it is not possible to have position losses being collaterized by another position profit.

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Equity managementEquity management

Long position

Add equity

Remove equity

Short position

Add equity

Remove equity

Equity management
Equity management