Q1) How to calculate insurance payoff?
Trader A short 20,000 BTCUSD position at $8,000 and the current market price rises to $10,000. The account suffered a loss:
20,000 * (1 / 10000-1 / 8000) =-0.5 BTC
If trader A short 20,000 BTCUSD position at $ 8,000 and the current price of BTC has risen to $ 10,000.
This time, he purchased 20,000 short protection concurrently at $ 8,000 index price. Trader A then chose to manually close the short protection. The index price at that time was $ 9,998.
Payoff: 20,000 * (1 / 8000-1 / 9998) = 0.49958BTC
Q2) What are the conditions to trigger payoff calculation?
The Insurance payoff will be payable if any of the following conditions below are met;
A. Insurance duration expired.
The duration (2 hours, 12 hours, 48 hours) selected by the trader has expired, payoff calculation will be triggered.
Trader A long 20,000 BTCUSD position at $ 8,000 and purchase 20,000 12 hours long protection concurrently at $8000 index price. When the insurance expires,
- if the settlement price is higher than $ 8,000, there will be no payoff.
- If the settlement price is less than $ 8,000, the system will calculate the payment calculation.
Assuming the settlement price is $ 7,000, the payoff is 20000 * (1 / 7000-1 / 8000) = 0.35714BTC
B. Manual settlement of insurance
Traders can choose to settle their insurance manually before the insurance expire.
Trader A long 20,000 BTCUSD position at $ 8,000 and purchase 20,000 12 hours long protection concurrently at $8,000 index price. If the trader manually closes the insurance at $ 7,500 index price;
The payoff amount is 20000 * (1 / 7500-1 / 8000) = 0.1666BTC.
C. The insured BTCUSD position has been liquidated
When the insured BTCUSD position has been liquidated, all the corresponding insurance will be immediately liquidated and payoff calculation will be triggered.
Trader A long 20,000 BTCUSD position at $ 8,000, liquidation price of the position is $ 7,500 and at the same time purchase 20,000 long protection at $ 8,000 index price. When the mark price reaches $ 7,500, the insurance will trigger payoff calculation because the position has been completely liquidated.
If the index price at liquidation time is $ 7,510, the settlement price is $ 7,510, and the payoff is as followed:
20000 * (1 / 7510-1 / 8000) = 0.1631BTC
If the index price at liquidation time is $ 7,490, the settlement price is $ 7,500 (max payoff) and the payoff calculation as followed:
20000 * (1 / 7500-1 / 8000) = 0.1666BTC
D. The insured BTCUSD position has been partially liquidated
The amount of insurance corresponding to the BTCUSD position being liquidated is immediately liquidated as well and payoff calculation will be triggered.
The trader short 10,000 BTCUSD positions at a price of $ 5,000. Liquidated price at $ 6,000.
When the price rises to $ 6,000, a partial liquidation is triggered and 2000 positions were liquidated.
The trader purchased 7,000 short protection. After the liquidation of 2,000 BTCUSD positions, there are still 8000 BTCUSD positions left. As only 7,000 short protection was purchased, the liquidated 2,000 BTCUSD positions will not be given any payoff. However, the trader can choose to manually close the insurance at this time.
Traders purchased 9,000 short protection and 2,000 BTCUSD position was liquidated. Of which 1,000 contracts will not be covered by insurance but the subsequent 1,000 will trigger 1,000 insurance payoff.
Please click here to find out more for the details when Partial liquidation occurs when the trader is holding on to multiple insurance entry.
Q3) What happens to my insurance contract if my insured BTCUSD position got close by my Stop loss/Take profit/Manually close?
Nothing will happen to the insurance contract. It will not be triggered unless it has reached the expiry time, insured position got liquidated/ partial liquidated or manually close by the trader.
Q4) What happens to my payoff if I adjust my leverage, initial margin, increase/decrease position size which changes my liquidation price?
The max payoff will still remain the same as its lock at the liquidation price corresponding to the existing BTCUSD position when the insurance has been purchased. Adjusting the above will only affect the time when the insurance got triggered due to liquidation.
Q5) Can I partially settle my insurance?
No. Trader can only choose to fully settle the insurance.
Q6) Can I buy more than 1 different duration type of insurance?
Yes, as long as you have sufficient insurable amounts and premium, you will be allowed to buy multiple different insurances at different duration and amounts on separate occasions.
"Add Insurance" means you still can purchase more insurance on top of your previous purchase.
A trader long 10,000 BTCUSD positions at $7000. When the price went up to $9,000, He purchased 5,000 insurance contracts for 48Hours as he would like to secure the $2000 profit he made by making use of the insurance mechanism. 2 Hours later, Price went higher to $11,000. He "add insurance" to purchase another 5000 insurance contract for 48 Hours to secure the more profit he had earn. Now he is unable to add more as he is already fully insured.
"Fully Insured" means you have already insured all your position
Q7) I selected 75% (750 insurance amount) out of 1000 insurance, can I purchase the remaining 250 insurance later?
No, as the minimum insurance amount for each insurance is 500, In this case, you won't be allowed to insure the remaining 250 contract quantity unless you purchase more BTCUSD contract position to the minimum contract size of 500.
Q8) Is the claimed amount on the insurance tab a realized profit?
No. the claimed amount displayed on the insurance tab is referring to the number of insurance that has already been payoff due to partial liquidation. The payoff amount can be view under your assets, insurance history record.
Q9) Is there a limit to how much insurance I can buy?
Yes. Per transaction limit is 200,000. The maximum an account can have is 1,000,000.
Q10) I have 1000 BTCUSD position and bought 1000 protection and had auto-renewal selected. What happens to my insurance if 600 insured BTCUSD contract position got close by Stop loss/Take profit/Manually close?
Nothing will happen to your insurance. It will not be triggered until it has reached the expiry time, insured position got liquidated or manually close by the trader. The auto-renewal however, will be canceled as the contract position is lesser than the insurance amount
Q11) Can I use bonuses to purchase insurance?
No. Bonus cannot be transferred to your insurance account which means it cannot be used to purchase insurance.
Q12) I forgot to select auto-renewal during purchase, what can I do?
At your insurance history tab, you can select the auto-renewal option on the right side of the insurance you bought.
Q13) If I am not holding on to any BTCUSD contract position, how can I transfer the premium out from my insurance account to my trading account?
The trader will be able to access the insurance account found under the assets page to do a transfer.
Q14) When my BTCUSD contract position got partially liquidated and I am holding on to multiple different insurance at different liquidation prices, insurance amount, and duration. Which insurance will be close first?
The system will prioritize in the following sequence:
Long protection: System will close the insurance with the higher liquidation price first.
Short protection: System will close the insurance with the lower liquidation price first.
If the existing insurance has the same liquidation price, the system will prioritize to close the insurance which is gonna expire first.
Q15) What are the competitive edge for using stop loss, hedging or insurance?
a) Stop loss are useful to limit and manage potential losses of a position. However, once triggered the position will be closed. Should the market recovers in favor of your position, any potential upside gain will be lost.
b) Hedging - Temporarily remove the value change of the pair due to volatility, this allows the trader to maintain the value of his position by sacrificing all potential downside/upside gain.
c) Insurance/Option - Maintain the potential upside gain while at the same time, protecting against significant loss by paying a small amount of premium to insured your position.
Q16) Why is my insurance payoff not able to fully cover my liquidated BTCUSD position margin loss?
Please note that when a fully insured BTCUSD position has been liquidated, the payoff amount received from the insurance and the loss incurred by liquidation may not be equal due to the following reasons:
a. Trading fees and Funding fees are used to calculate the Closed Profit and Loss calculation. These few variables are not found in the computation for mutual insurance.
b.The Mutual insurance premium is primarily derived by the Black Scholes Model. The premium will be higher for larger insurance amounts, higher volatility of index price, higher insured price of long protection (the lower insured price of short protection), larger maximum payoff, and longer insurance duration. Additionally, it has been further adjusted by utilizing the following Coefficients: Mutual Insurance Fund Coefficient, Maximum Payoff Coefficient, and Short-Term Insurance Sentiment Coefficient to provide a competitive and fair premium for our traders.
c. Mutual Insurance uses BTCUSD index price for insured (entry) and settlement (exit) price while BTCUSD perpetual contract is calculated based on the executed price (best available price/LTP in the market at the time of execution.
d. For perpetual contract, liquidation occurred when mark price reaches liquidation price and this signifies that the position no longer has sufficient margin to hold at the current maintenance margin price level. Assuming the trader is using the lowest risk limit level of 0.5% maintenance margin, the entire position will then be taken over by the liquidation engine and the position will be settled and displayed at its bankruptcy price.
e. For mutual insurance upon liquidation, the system will use the BTCUSD index price at the time of liquidation as the settlement price to calculate the payoff amount with comparison to the BTCUSD index price at time of entry known as the insured price.
In conclusion, mutual insurance and perpetual contract has their own unique set of formula to calculate profit/loss and this is the reason why the max payoff amount received from the insurance may not be able to fully cover the entire position margin loss from the liquidation.
Q17) What happen if i buy insurance when BTCUSD position is close to liquidation?
The formula to calculate insurance premium heavily rely on the risk of the insurance at the time of purchase. The premium will increase substantially as BTCUSD position is closer to liquidation to the point where the max payoff value may be equal to the premium paid, making it no longer appealing to the trader to purchase the insurance.
Q18) Can I use API to operate the mutual insurance functions?
Currently this is not available yet, please ask our live chat support for any latest update.
Q19) How to calculate the mutual insurance payoff amount?
The Mutual Insurance payoff calculation method is similar to the inverse perpetual contract profit & loss(PnL) calculation, as such the PnL calculator in the platform may be used to determine payoff.
Long Protection Payoff = Insurance Amount * (1/Settlement Price - 1/Insured Price)
Long inverse perpetual contract PnL calculation = Number of contract * (1/Average entry price - 1/exit price)
Short Protection Payoff = Insurance Amount * (1/Insured Price - 1/Settlement Price)
Short inverse perpetual contract PnL calculation = Number of contract * (1/exit price - 1/average entry price)
*Please note that Insurance payoff calculation is calculated based on Index price
Q20) How to read the payoff graph?
Insured amount: The amount of BTUSD contract position trader would like to insure
Select Insurance duration: How long will the insurance be active
Premium: The premium insurance cost for this insurance.
From the payoff graph, it can be seen that the trader will be purchasing insurance at an insured price (entry) of 10533.02. If the BTCUSD position has been liquidated at 9625 liquidation price (mark price), the mutual insurance will potentially be rewarded with a max payoff value of 0.0046 premium. Take note that the insured price and settlement price are calculated by using index price and the actual payoff value will be based on the payoff calculation.