Strategy 03 · Derivatives
Hedging Spot Exposure
Keep the yield. Remove the price.
Many positions in Wesvel’s book are held for something other than price: a staked asset for its issuance, a liquidity position for its fees, collateral for the margin it provides. Each of them also carries the price of the underlying asset, which may be exposure the mandate does not want. A short futures position removes it while the underlying keeps doing its job.
Choosing the instrument
Perpetual futures hedge continuously and can be adjusted at any time, at the cost of paying or receiving funding. Dated futures fix the cost of the hedge to expiry but must be rolled. Options hedge asymmetrically, protecting the downside while keeping the upside, for a premium. The choice depends on how long the underlying position will be held, how precisely it needs to be hedged, and what the funding and basis markets are pricing at the time.
Hedge ratio
A staked token, a liquidity position or a yield-bearing wrapper does not move one-for-one with the underlying asset. The hedge ratio is estimated from the instrument’s structure and its observed relationship to the asset, and it changes: a concentrated liquidity position’s exposure shifts with price, a staked token’s with its discount. The ratio is recomputed continuously and the hedge adjusted on a rule.
Basis and funding cost
A hedge is not free. A short perpetual receives funding when the market is long-biased and pays it when it is not. A short dated future locks in the basis at inception, which is a cost when the future trades at a premium to spot. Hedging cost is measured against the yield the underlying position generates; a position whose yield does not cover its hedge is not held.
Practice
How Wesvel approaches it
- 01Every yield position has a stated hedge policy (full, partial or unhedged) recorded at inception and reviewed on a schedule.
- 02Hedge ratios are recomputed from live data and rebalanced on a rule that trades precision against transaction cost.
- 03Hedges are held on venues that have passed counterparty diligence, sized within venue limits, and margined where possible with yield-bearing collateral.
- 04The combined position, underlying plus hedge, is what is risk-managed, not either leg alone.
More in Derivatives
- Basis and CarryCapturing the premium of dated futures over spot as it converges at expiry, and the funding equivalent in perpetuals.
- Relative ValueTrading differences in funding, basis and term structure across venues, assets and expiries with limited net direction.
- Options and VolatilityHow options are used in the book, for asymmetric hedging, for carry on implied volatility, and for expressing views on how much markets will move.