Cash and Carry Arbitrage
Example of a Power Perps Cash and Carry Arb
Power Perps Cash and Carry Trade
For power perps, there are two key prices:
The index price - price to mint power token, defined by base asset squared.
The mark price - price of sqASSET in the concentrated liquidity pool.
Typically, the mark price should trade slightly above the index price. However, if demand is much higher than available liquidity, then the mark may trade at a premium, presenting a cash and carry arbitrage opportunity.
Example Scenario
Start
Mark price is trading at a 16.17% premium over the index price.
We can mint sqOSMO at the index price and sell it for the mark price.
| Description | OSMO Price | Index Price | Mark Price (Premium) | Funds (OSMO) | Funds (sqOSMO) |
|---|---|---|---|---|---|
Initial | $0.7449 | $0.5549 | $0.6451 (16.17%) | 150 | 0 |
Mint
Creating a collateral vault with 150 OSMO to get 100 OSMO of sqOSMO exposure.
Minting 1342433 sqOSMO using 100 OSMO at the index price.
| Description | OSMO Price | Index Price | Mark Price (Premium) | Funds (OSMO - Locked Collateral) | Funds (sqOSMO) |
|---|---|---|---|---|---|
Mint sqOSMO | $0.7449 | $0.5549 | $0.6451 (16.17%) | 150 (locked) | 1342433 |
Sell
Selling sqOSMO at a premium in the pool for approximately 116 OSMO.
| Description | OSMO Price | Index Price | Mark Price (Premium) | Funds (OSMO + Locked Collateral) | Funds (sqOSMO) |
|---|---|---|---|---|---|
Sell sqOSMO | $0.7449 | $0.5549 | $0.5659 (2%) | 116 + 150 (locked) | 0 |
Buy and Burn
Unwinding the position by buying back the original sqOSMO at a reduced premium and burning it to unlock collateral.
Using 102 OSMO to repurchase 1342433 sqOSMO.
| Description | OSMO Price | Index Price | Mark Price (Premium) | Funds (OSMO + Locked Collateral) | Funds (sqOSMO) |
|---|---|---|---|---|---|
Buy & Burn | $0.7449 | $0.5549 | $0.5659 (2%) | 14 + 150 (locked) | 1342433 |
Final Result: Realizing a profit of 14 OSMO.
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