Links

Delta Hedging

Arrow's Automated Hedging Engine (AHE) manages a portfolio that dynamically tracks the AMM's option obligations.

Delta Hedging

The Arrow system runs an automated hedging engine to keep the risk profile of the trading pool insensitive to underlying price movements. This works as follows. Along with prices, the AMM calculates a
Δ\Delta
(a "delta"), or hedge position for each new option added or removed from the system. The smart contract that houses the trading pool balances then takes that
Δ\Delta
and picks up the corresponding balance in the underlying. If the net
Δ\Delta
is positive, the position is obtained by programmatically swapping stable coin for the underlying (or vice-versa, depending on the sign of the option
Δ\Delta
on a DEX such as Pangolin or Trader Joe. If the net
Δ\Delta
is negative, the position is obtained by programmatically interacting with an on-chain lending protocol such as BenQi or Banker Joe. In the latter case, if the option
Δ\Delta
is negative, the short position in the underlying is increased, and if the option
Δ\Delta
is positive, the short position is decreased.