Risk Pricing : Premium & Delta.

1. Premium: Upfront Protection Cost

The premium is the upfront fee paid by the borrower which compensates lenders for the risk of borrower default and market volatility over the fixed loan term. This premium is:

• Priced dynamically based on market volatility, loan duration, and collateral risk profile.

• Modeled like an insurance premium, reflecting the probability and impact of default.

• Transparent and fair, with no hidden fees; borrowers know their total cost upfront.

• Uses stochastic models (e.g., Brownian motion, realized volatility) to quantify expected loss due to price fluctuations.

• Funds from the premium can be used by lenders to hedge risk via options or dynamic delta hedging.

2. Delta: Market Risk Sensitivity

Delta represents the sensitivity of the loan’s value to price changes in the collateral asset—essentially, how much the lender's exposure changes per unit move in the collateral price.

• Risk underwriters assess the delta exposure to ensure the premium covers not just expected default but also price movement risk.

• Lenders may dynamically hedge the delta risk using derivatives like perpetual futures (perps) to offset potential losses from collateral price drops before maturity.

• If lenders choose not to hedge, delta risk remains embedded in their expected returns and must be priced into the premium.

• Delta is highest for loans with higher LTVs, longer durations, or more volatile assets, requiring proportionally higher premiums to compensate.

Practical Implication

• The combined premium and delta assessment enables Stormbit’s lenders to price loans precisely and competitively while safeguarding capital.

• Borrowers benefit by paying a transparent, risk-aligned cost up front instead of facing variable margin calls or liquidations.

• The risk underwriter tools integrate real-time and historical volatility data, customizable term parameters, and lending manager discretion, fostering a decentralized and efficient lending market.