Risk Management Outline

<aside> 📌 Comprehensive Risk Analysis of ARB-Collateralized Treasury-Backed Vaults (TBV)

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Abstract: Multidimensional Optimization Problem

1. Liquidation Threshold
   • Determine the maximum relative borrowing limit against ARB collateral before liquidations are triggered.
2. Debt Ceiling
   • Establish the total allowable debt against ARB collateral in aggregate.

Historical Volatility and Liquidity

• Volatility Analysis
  • Provide plots of ARB's historical volatility over time.
  • Identify and interpret trends and patterns in the volatility data.
• Liquidity Analysis
  • Plot historical liquidity metrics for ARB.
  • Analyze trends to understand periods of high and low liquidity.
• Value at Risk (VaR) Methodology
  • Leverage Chaos Labs’ Value at Risk (VAR) methodology to quantify the liquidation threshold and liquidation bonus.

Debt Ceilings and Cascading Liquidation Events

• Isolation Mode Methodology
  • Apply Chaos Labs’ isolation mode methodology to determine appropriate debt ceilings for ARB.
  • Provide an intuitive explanation of results and their implications.
• Cascading Liquidation Events
  • Discuss how a higher liquidation threshold and liquidation bonus impact the debt repayment amount to maintain a healthy position.
  • Explain the resulting increase in selling pressure and potential market impacts.

Initial Loan Health Ratio

• Probability of Liquidation Event:
  • Define the probability of a liquidation event based on the volatility of the underlying asset and the quantified LTV.
  • Use historical volatility data and statistical models to estimate the likelihood of the asset price dropping to a level that triggers liquidation.
• Safety Buffer in ARB:
  • Determine the amount of ARB that needs to be set aside as a safety buffer to top up debt positions.
  • Calculate this buffer considering potential price drops in ARB to ensure it effectively decreases the probability of liquidation.
  • This buffer should be dynamically adjusted based on real-time market conditions and asset price movements.
• Initial Health Recommendations:
  • Provide both conservative and aggressive recommendations for the initial health of the position and the frequency of position top-ups.

Targeted Liquidations and ARB Price Manipulation

• Aggregate CDP Size and Liquidity
  • Analyze the risk of price manipulation due to large aggregate CDP size relative to market liquidity.
  • Quantify the potential for external parties to manipulate ARB prices during liquidation events.

Interest Rate Settings and Intraprotocol Compliance