Author: Tamas Blummer 2018-12-28 22:25:20
Published on: 2018-12-28T22:25:20+00:00
Tamas Blummer discusses the issue of no mechanism in LN to require compensation for opportunity cost and a premium for optional exercise. He suggests that exchanges will still make such offers but with an exchange rate between the assets that compensate them for the cost they incur by making the offer. Exchanges will also limit the quantity of outstanding offers, so they can manage the risk of options written. ZmnSCPxj points out that the option premium cannot be charged in the not-exercised branch, which is effectively a premium-free option. This means that rational entities who know of this technique will create options "for free" until the exchange runs out of liquidity. This creates a shift in exchange rate, which is precisely what the American Call Options are waiting for. These American Call Options drain funds from the exchange, until the exchange stops being profitable and stops operating as an exchange, again further weakening the weaker asset as it is now even harder to pay from the stronger asset network to the weaker asset network.
Updated on: 2023-06-02T16:09:00.581434+00:00