Liquidation Risk. The high volatility of cryptocurrency prices and highly levered positions result in many positions having trading losses that exceed their posted margin. Indeed, these liquidations where the exchange closes the position and the trader receives zero are common (Xxxxx, Dong, Khodaverdian, Xxxxxx-Xxxxx, Routledge, and Xxxxxxxx (2021)). As mentioned, the positions on the exchange are “non-recourse” so traders can choose to post additional margin to avoid liquidation, but are not required to do so. Liquida- tion, however, is not costless. When a trader enters into a perpetual futures contract at price Ft, they establish a margin position at the exchange by depositing αFt dollars (for a moment, focus on the Tether-denominated account). The exchange policy has a minimum bound on α for initiating a new position. Subsequently, the exchange has a “maintenance margin” requirement that is used as the trigger for liquidation. The size of the maintenance margin varies by account size and initial leverage but is typically less than 1/2 of the initial margin. The automated liquidation sells (or buys) until your position is back within limits and charges a “liquidation fee.” With the volatility of cryptocurrency prices, complete liquidations are not uncommon. Ef- fectively, this is costly since the position is closed prior to the margin balance reaching zero but with the trader receiving zero. How does the margin size determine the probability of liquidation? Interestingly, the probability of liquidation differs across the Tether and coin denominated contracts. If we look at equation (5) for a Tether long position and the analogously for a short position, the conditions for the position being liquid (i.e., trading losses are not larger than the margin) are: Long Tether: Ft+1 Ft Short Tether: Ft+1 Ft ≥ 1 − α − r (10) ≤ 1 + α + r (11) Similarly, for the coin denominated contract from equation (7). Here, solvency re- quires: Long Coin: Ft+1 Ft Short Coin: Ft+1 Ft −
Liquidation Risk. When the net asset value of the ETF is lower than the prescribed minimum net asset value on any specific valuation date or other special circumstances, the fund management company may decide to liquidate after its own assessment, selling all related assets for liquidation.
Liquidation Risk. When the value of the net assets of this product is lower than the specified minimum net asset value on any particular evaluation date, the fund management company will sell all its assets for liquidation. After receiving the relevant information, the Trustee will notify the Settlor and will properly handle related matters in accordance with the trust agreement between the Trustee and the Settlor.
