Pricing Kernel
Last updated
Last updated
Zomma Protocol calibrates fragmented and inconsistent option prices sourced from a variant of CEX and DEX through Heston Model calibration, converting them into a continuous price curve, meaning each SKU (with different strike prices, calls and puts products) can be quoted theoretically through our pricing mechanism. For circumstances whereby the Implied Volatility (IV) obtained through the previous calibration of Heston Model deviates significantly from the original source, IV calculated through the alternate Wing Model would then be used and replaced.
Despite having the theoretical price, Zomma includes the variable of available liquidity as an additional parameter whereby the aforementioned price undergoes Black-Scholes Model to generate its respective IV. With differentiated IV for Bid and Ask, the final price is therefore calibrated upon the available liquidity through Zomma’s very own pricing kernel. The parameter tilts differently when the utilization of funds is lesser/greater than 95%.
Heston Model is a stochastic volatility model, assuming the volatility of the asset as a non-constant, nor deterministic, but follows a random process, indicating the volatility of volatility (Volvol). Heston models derivatives more accurately and better suits the volatility nature of cryptocurrency especially in the shorter time-frame.
Due to the sensitive nature of option pricing, massive calculation is expected to be too overloaded on chain. Zomma Protocol subsequently resolves the issue with an on-chain pricing map, containing all essential parameters that are constantly updated, especially IV in minutes with the consideration of the availability of liquidity from the pools in response to the high sensitivity of option pricing to ensure a competitive quotation.
Price is adjusted upon the utilization rate of each pool
Price is adjusted from 0% ~ 10% for utilization rate with 0% ~ 95%
Price is adjusted from 10% ~ 100% for utilization rate with 95% ~ 100%
