Exposure with Managed Risk

A spot position being accumulated over days can be pre-positioned in perpetuals and rolled into spot as fills arrive, so that the desk is not underexposed while it works the order. A relative-value spread that is cheap to hold in perpetuals and expensive to hold in spot is held where it is cheap. An event the book has priced can be expressed in the asset most sensitive to it. In each case the perpetual is chosen because it is the most liquid and cheapest way to hold the exposure, not because it offers leverage.

The venue will lend far more than the desk will use. Position size is set backwards from two numbers: the loss the desk is prepared to take if the view is wrong, and the distance to liquidation that must remain after the move that would produce it. The smaller of the two sizes wins. Margin requirements are a floor set by the venue; the desk’s own limit is always well inside it.

Margin is held in stablecoins rather than in the asset being traded, so that a fall in the asset does not shrink the collateral at the same time as it hurts the position. Where a venue allows cross-margin, the desk decides deliberately whether a position shares collateral with the rest of the account or stands alone, because cross-margin lets a winning position support a losing one and also lets one bad position take the account with it.

A long perpetual pays funding when the crowd is long, which is usually when the desk is trying to add exposure. That payment is a real cost of holding the view and is tracked against it, so that a position which is right on direction and wrong on carry is recognized as such. Where the same exposure can be held in a dated future at a better implied rate, it is, and the choice between them is part of the trade.

Every added exposure carries three exits written down at entry: the level at which the view is wrong and the position is closed, the level or the date at which the view has paid and the exposure is rolled into spot or closed, and the liquidation distance at which size is reduced regardless of view. Liquidation management runs on top of all three, but the aim is that it never has to act.