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[stochastic]

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[Sukrim]

Couldn't you issue bets on betsofbitco.in cheaper? It seems to me that all you do is bet on some set criteria to be met or not and then all that is done is take the money from the other part and give it to the ones that predicted correctly.

If everyone goes short or long though, there's no money in this anyways - where's the incentive to go long on GIGAMINING for example, if nobody dares to go short?

What happens if in the middle of the night (for you) the asset XYZ fulfills the "short" criteria - how do you stop trading or make sure there's no panic-sale of long positions etc.? To me this just looks like a worse alternative to betsofbitco.in, just with a lower house edge at least (2% instead of 10%), but with worse moderation.

Does "pair of bonds" mean by the way, that you will only sell the same amount of bonds on each side? Something like "500 HEDGE.GIGAMINING.SHORT for 0.1 BTC and 500 HEDGE.GIGAMINING.LONG for 0.1 BTC", even if the demand is very strong on only one side?
An example: There are bids for 100 SHORT and 10 LONG - will you sell 10 SHORT + 10 LONG in this month or 100 SHORT, 10 LONG and have an open ask of 90 LONG for 0.1?

I'd love to see this kind of thing for YABMC

[friedcat]

Introducing the HEDGE family of insurance bonds from the Stochastic Insurance Company.  These bonds will act as an insurance on GLBSE assets.  These bonds are used to hedge against financial loss due to assets not paying expected dividends or due to failure.

How it works:

A pair of bonds will be traded on GLBSE for different assets.  The pair of bonds will be named HEDGE.<ASSET>.LONG and HEDGE.<ASSET>.SHORT.  The .LONG assets believe that the ASSET will meet its contractual obligations as detailed in the HEDGE.<ASSET>.LONG contract.  The .SHORT assets believe that the ASSET may not meets its contractual obligations as detailed in the HEDGE.<ASSET>.SHORT contract.

The assets will be auctioned off on GLBSE at the beginning of each month for 0.10 BTC per bond.  All proceeds from the pair of bond sale will be held in trust.

In the event that the ASSET meets the contract terms the BTC held in the trust will be divided proportionally to the HEDGE.<ASSET>.LONG bond holders and the HEDGE.<ASSET>.SHORT holders would receive no payment.  In the event that the ASSET DOES NOT meet the contract terms the BTC held in the trust will be divided proportionally to the HEDGE.<ASSET>.SHORT bond holders and the HEDGE.<ASSET>.LONG holders would receive no payment.

There will be a 2% management fee on the bonds but the fee will only be imposed on the side of the bond that mature worthless.  For example, if the ASSET meets the contract and HEDGE.<ASSET>.LONG receives the payment, the fee will be imposed on the proceeds from the sale of the HEDGE.<ASSET>.SHORT.

Interesting. Seems like you are holding different sets of dual bets.

I expect HEDGE.USD.LONG, HEDGE.OIL.SHORT or HEDGE.NORTH-KOREA-NUKES-EVERYONE-ELSE-BEFORE-CHRISTMAS.LONG soon.

Yes, anything is possible, but I first want to get soem of the listed assets on GLBSE, especially those that have obligations to their share/bond holders.

My first asset I will likely list will cover TYGRR-BANK and PPT family of bonds.  Then I will move to the highest traded assets on GLBSE.

My question for investors is which security would you like to be covered.

I think at least HEDGE.USD.LONG/SHORT will attract some interests, since Bitcoinica is offline and unlikely to operate soon. People could turn to your asset, no matter if they want more risky things to bet on or more insurance to hedge their portfolio.

[ineededausername]

Example

Alice own shares of PPT.A but there is risk that Bitcoin Savings & Trust will default causing her to only be paid 0.32 BTC per PPT.A bonds she holds.  Alice speculates that BST has a 10% chance of defaulting before she receives payment of 1.28 BTC per bond as promised in the PPT.A contract.

Using a probability of default (PD) of 10%, Alice can calculate her expected loss.  Her exposure at a default (EAD) is 1.28 BTC, as she is suppose to be paid 1.28 BTC at the maturity of the bond.  If BST does default she is able to recover 0.32 BTC, which is a recovery rate (RR) of 25%.  Alice's actual loss given a default (LGD) would be 75%.

The expected loss (EL) is:

EL = PD * LGD * EAD

where,

PD = probability of default
LGD (loss given default) = 1 - RR
RR (recovery rate) = collateral / bond face value

Alice thinks BST has a probability of default of 10%.  Using the equation:

EL = 0.10 * 0.75 * 1.28 BTC
EL = 0.096 BTC

Alice would expect to lose 0.096 BTC for every PPT.A bond.

Alice wants to remove this risk, so she purchases some HEDGE.PPT.SHORT bonds.

Bob is a speculator.  He sees that HEDGE.PPT.LONG will pay him if PPT pays out the 1.28 BTC at maturity for their bonds in a certain amount of time.  He also sees that in case of default by BST, PPT.A will only pay 0.32 BTC per bond.  Bob feels that BST only has a 10% chance of defaulting and thus Bob has a 90% chance of receiving a return on his investment.  He purchases some HEDGE.PPT.LONG bonds.

At the end of the auction, 900 of the HEDGE.PPT.LONG bonds sell for 0.10 BTC each and 100 of the HEDGE.PPT.SHORT bonds are sold for 0.10 BTC each.  The proceeds from the bond sale are then held in trust.

Going back to Alice.  She only purchased one HEDGE.PPT.SHORT bond at 0.10 BTC.  It turns out that BST did default and was unable to pay interest.  This caused PPT.A to only pay Alice 0.32 BTC for the bond that she held.  As Alice held 1 of the 100 HEDGE.PPT.SHORT bonds and PPT.A failed to pay the face value at maturity, Alice's HEDGE.PPT.SHORT bond receives her distribution of the funds held in trust.  The pot is valued at 100 BTC [900 .LONG bonds * 0.1 BTC + 100 .SHORT bonds * 0.1 BTC].  The 2% fee is imposed on the HEDGE.PPT.LONG proceeds 0.02 * (900 bonds * 0.1 BTC ), which comes out to 1.80 BTC.  The total funds distributed to the HEDGE.PPT.SHORT is 98.2 BTC [100 BTC - 1.8 BTC fee].  There are a total of 90 outstanding HEDGE.PPT.SHORT bonds and each bond would receive 1.091111 BTC per bond.

As Alice also received 0.32 BTC from PPT.A and 1.091111 BTC from HEDGE.PPT.SHORT, Alice was still able to make a profit, assuming she did not pay more than 1.4 BTC per PPT.A bond.  Bob does take a loss of his speculation as the HEDGE.PPT.LONG matures worthless.

In the case that PPT.A does pay the 1.28 BTC face value at maturity then Alice gets her 1.28 BTC but she loses the 0.10 BTC on the HEDGE.PPT.SHORT bond she purchased.  Bob on the other had holds a HEDGE.PPT.LONG bond, and thus gets paid from the pot.  Subtracting the fee, the pot is now 99.8 BTC.  There are 900 total HEDGE.PPT.LONG bonds, thus, each bond receives 0.1108889 BTC, a 10.9% return for Bob.

Nope, that's not how it works

"A pair of bonds will be traded on GLBSE for different assets.  The pair of bonds will be named HEDGE.<ASSET>.LONG and HEDGE.<ASSET>.SHORT.  The .LONG assets believe that the ASSET will meet its contractual obligations as detailed in the HEDGE.<ASSET>.LONG contract.  The .SHORT assets believe that the ASSET may not meets its contractual obligations as detailed in the HEDGE.<ASSET>.SHORT contract."

Our asset's contractual obligations are to pay 1.28 if Pirate does not default, and 0.32 if he does.  Thus, even if Pirate defaults, we will be meeting our obligation, which is to pay out 0.32.

Perhaps you mean to make a PIRATE.LONG and PIRATE.SHORT pair?

[ineededausername]

Nope, that's not how it works

"A pair of bonds will be traded on GLBSE for different assets.  The pair of bonds will be named HEDGE.<ASSET>.LONG and HEDGE.<ASSET>.SHORT.  The .LONG assets believe that the ASSET will meet its contractual obligations as detailed in the HEDGE.<ASSET>.LONG contract.  The .SHORT assets believe that the ASSET may not meets its contractual obligations as detailed in the HEDGE.<ASSET>.SHORT contract."

Our asset's contractual obligations are to pay 1.28 if Pirate does not default, and 0.32 if he does.  Thus, even if Pirate defaults, we will be meeting our obligation, which is to pay out 0.32.

Perhaps you mean to make a PIRATE.LONG and PIRATE.SHORT pair?

Just an example, the obligation will be specified in the HEDGE.<ASSET>.LONG/SHORT contract.  Thus in that contract the obligation would be that the PPT.A bond would return 1.28 BTC at maturity.  If it did not then it would not meet its obligation as specified in the HEDGE.<ASSET>.LONG/SHORT contract.

For other assets it would be if they return x number of dividends in a set time period.

That makes sense, but it would make more sense to call it HEDGE.PIRATE.LONG/SHORT.  Just a suggestion.

By the way, good idea. 

[gabbynot]

sub

Excellent info, thanks for the post.

[MarketNeutral]

This is interesting.

I believe that having choices for hedging strategies is important.

A few questions:

Do you have any plans or would it be possible to implement any options bonds, such as straddle- or strangle-specific bonds? Can I easily make straddle and strangle trades with these bonds or is that not possible under the current exchange?

Could you clarify the limitations or parameters of what you consider an 'asset'?

With whom and in whose name specifically and under what conditions are the assets held in trust? For example, my widgets equities are held with a broker-dealer in street name (like Cede & Co) under general conditions of the DTCC and NASDAQ, whereas my wingding bonds are held with an offshore trust in my name under specific terms established by a private international business corporation.

[Sukrim]

It would be cool if you would pay all income from HEDGE.YXZ.SHORT/LONG to the HEDGE symbol and open this one up for trading as well. You could still keep 90% or so of these but they might rise in demand + price.

Also maybe you could even offer the SHORT/LONG positions at 1 Bitcent (0.01 BTC) each, to increase liquidity. Oh and yes, even though I hold a few shares I'd love to go short on DMC as well (and probably TEEK.B). SATOSHISDEAMON.HORSE also seems like a good fit to your model.

[rdponticelli]

Interesting.

[exahash]

At the end of the auction, 900 of the HEDGE.PPT.LONG bonds sell for 0.10 BTC each and 100 of the HEDGE.PPT.SHORT bonds are sold for 0.10 BTC each.  The proceeds from the bond sale are then held in trust.

Going back to Alice.  She only purchased one HEDGE.PPT.SHORT bond at 0.10 BTC.  It turns out that BST did default and was unable to pay interest.  This caused PPT.A to only pay Alice 0.32 BTC for the bond that she held.  As Alice held 1 of the 100 HEDGE.PPT.SHORT bonds and PPT.A failed to pay the face value at maturity, Alice's HEDGE.PPT.SHORT bond receives her distribution of the funds held in trust.  The pot is valued at 100 BTC [900 .LONG bonds * 0.1 BTC + 100 .SHORT bonds * 0.1 BTC].  The 2% fee is imposed on the HEDGE.PPT.LONG proceeds 0.02 * (900 bonds * 0.1 BTC ), which comes out to 1.80 BTC.  The total funds distributed to the HEDGE.PPT.SHORT is 98.2 BTC [100 BTC - 1.8 BTC fee].  There are a total of 90 outstanding HEDGE.PPT.SHORT bonds and each bond would receive 1.091111 BTC per bond.

There's a mistake in that last sentence.  There are really 100 HEDGE.PPT.SHORT in your example, so the payout is .982 BTC per bond.

That carries over to the next sentence:

As Alice also received 0.32 BTC from PPT.A and 1.091111 BTC from HEDGE.PPT.SHORT, Alice was still able to make a profit, assuming she did not pay more than 1.4 BTC per PPT.A bond.  Bob does take a loss of his speculation as the HEDGE.PPT.LONG matures worthless.

So alice's take in the case of pirate defaulting is 1.302 BTC.

Since the quantities of each bond sold/outstanding will be publicly available, this could produce some strange cases of misplaced incentives.

You'll also need a timing mechanism.  e.g.  What if I wait and see that the underlying has in fact met its obligation (or not), then jump in and buy a bunch of the .long (or .short). 

[hazek]

If everyone goes short or long though, there's no money in this anyways - where's the incentive to go long on GIGAMINING for example, if nobody dares to go short?

What do you think would this say about the risk of holding the underlying assets?

This is a great idea of how to determine the risk factor for all assets traded on GLBSE and I hope it works out!

[Stephen Gornick]

People may notice that a HEDGE ticker is already registered on GLBSE.  HEDGE is for future fundraising for new assets to be covered in the HEDGE.<ASSET>.LONG/SHORT bonds after it is shown that there is a market for these types of bonds and a profit is being made on the fees.

I will add this to the OP just to remove any confusion.

Do you have to pay the 8 BTC fee for each of these assets?

Does registering a ticker give exclusivity on that namespace then?  e.g., nobody else can do a HEDGE.BLAH.SHORT themselves?

[Gladamas]

Is it possible to create a Pirate surety bond? (Either FOO.PPPPT, TYGRR.BOND-P, etc.) I've been looking for a Pirate short hedge.