Risks subject to the change in Rates

Interest Rate Risk

Even if the interest remains the same as when you entered the trade, you can still lose money if you exit very early. This is due to the fact that you didn't wait long enough to cover your liquidity fees.

This example would make a lot of sense to describe the above scenario:

The example assumes the entry and exit interest rate to be equal and the time you held the position to be 6 days. In this case, you would incur a loss of 0.53 Cash thus a negative APY of -38.5%.

There can still be a loss incurring trade when the interest rates increase substantially. Recall we have already gone through the impact of raised interest rate at the time of exit.

... at the time of exit, the interest was 6%. This rise in the interest rate impacted the profits (1.56 Cash now vs 2.07 Cash earlier) and the APY dropped to 3.1%.

Context: Valuing fCash

Let us go through a loss-making trade:

The example assumes the entry interest to be 5% and the exit interest rate to be 7% at the time of exit. You held the position for 3 months. In this case, you would incur a loss of 0.78 Cash thus a negative APY of -3.13%.

But you can mitigate the above loss if you hold your position for more duration because the exchange rate between fCash:Cash would approach 1:1 as we approach maturity. But how to calculate how many days you should hold your position?

Here is the break-even analysis:

If the exit rates were to be 7% and you exited after 130 days would incur 0 loss & 0 profits.

Maturity Risk

Longer-dated fCash is more sensitive to interest rate movements than shorter-dated fCash.

If we you compare the difference in value of the 6 Months fCash and 1 Year fCash resulting from the change in the interest rates, the difference in value for 1 Year fCash will be greater than that of 6 Month fCash.

For example, assume the rates to be 6% and the value of fCash for 1 Year maturity and 6 Month maturity would trun out to be 0.9418 & 0.9705. Now if we chnage the interst rate to 7% the value chnage to 0.9324 & 0.9657 respectively.

1 Year fCash shows a greater price chnage compared to the 6 Month fCash.

Appendix

You can fork this tool to experiment and plan your trades. Here is the output it generates: