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Fixed Coupon Notes (FCN)

Earn fixed yields on USDC with up to 50% downside protection

What is FCN?

FCN is an exotic structured product with both equity and bond-like characteristics. Traders earn high, daily yield payments on their deposited capital until the FCN expires or matures. At expiry, the initial deposit is returned to traders in full if the price of the FCN's underlying assets has not fallen beyond the predetermined Knock-In level (e.g. 50% or more).
FCNs are valuable investments for traders seeking superior fixed yields and lower risk and who are positively or moderately bullish on the price of the underlying crypto assets.

How do they work?

The user simply has to deposit USDC into an FCN vault. Polysynth then aggregates deposits across various FCN vaults before sending it to the winning market maker who quotes the highest APY.
In case of a normal expiry, the settlement is done, and the yields earned are returned to the vault or redeemed as per the payoff. And in case of a Knock-Out before the entire tenure of the FCN, the vault is re-auctioned for the number of days left in the tenure.

How are the Knock-In / Knock-Out parameters selected?

The Kock-In / Knock-Out parameters are algorithmically selected as per our proprietary algorithm. One of the key factors affecting the parameters is the ongoing implied volatility of the underlying assets. The higher the implied volatility, the farther apart from the spot price will be the Knock-In / Knock-Out level.

What is the risk?

Principal Risk
If the FCN experiences a knock-in event during its tenure, the payoff is calculated based on the worst-performing asset from the underlying asset basket. Say, if the value of an underlying asset goes below the knock-in price level, you risk losing your principal pro-rata to the percentage drop in the worst-performing asset at maturity among the basked of assets. However, you will still receive the coupons for the entire 28 days, even in case of a knock-in event, cushioning the downside.
Smart Contract Risk
There is a risk of smart contract failure in the underlying vault or in the protocol partners we work with, for example, pricing oracles. We aim to reduce smart contract risk by - undergoing frequent audits and organising bug bounties.
Credit Risk
Credit risk is potential expected losses that would arise for one counterparty because of default on or before the contract's maturity by another counterparty to the contract. Olive only trades with reputed market makers who have passed KYC / AML checks and have a history of creditworthiness.

How sustainable and scalable is PPN?

FCN scalability and sustainability depend on the depth of the derivatives market and credit demand in DeFi. Demand for credit can fluctuate however it will not likely be zero. Further, the global structured products market being $7 trillion means we can sustainably scale to a large TVL before the yields start to get affected by our size. We also constantly look to onboard top market makers so that we can get the best quotes on our strategies.

Fees

The fee structure consists of a 2% management fee and a 10% performance fee. The management fee is applied as a percentage of the total assets in the vault, while the performance fee is applied to the premium received or yield generated by the vault every week.
Example
Suppose you invested 10,000 USDC in the FCN. The management fee is charged annually on a pro-rata basis @ 2%, i.e. 2% / 52 Weeks = 10,000 USDC x 0.02/52 = 3.84 USDC. Now, suppose the strategy generates 40% APY, meaning 10,000 USDC will become 14,000 USDC. An annual pro-rata performance fee of 10% will be charged on the gains, which is 4,000 GLP x 10%, i.e., 400 USDC.
Therefore, the net gain made by the users is 14,000 - 3.84 - 400 = 13,596.16 USDC, which is ~ 35.96% APY net of fees.

FCN Pay-Off Scenarios

For each scenario below, assume the following:
  • $1000 initial investment in the FCN vault
  • 28-day investment duration
  • Two underlying crypto assets = ETH, BTC
  • 80% APY (Compounded Annual Yield)
    • = 60.24% APR (Non-Compounding Annual Yield)
    • = 5.02% yield every month (60.24% / 12 months)
    • = 0.179% yield every day (5.02% / 28 days)
    • = $1.79 yield per day (0.179% * $1000 deposit)
  • Knock-in (KI) barrier level is 50%
  • Knock-out (KO) barrier is 130%

Scenario #1 - Normal expiry, spot closing above 100%

FCN: Scenario 1
What happens in this example scenario?
  • FCN start date = July 29, 2022
  • No knock-out or knock-in events therefore, the FCN reaches its full 28-day duration and expires as normal
  • The spot price of all underlying assets closed above 100%
  • None of the assets exceeded the Knock-out (KO) Barrier at 130% or fell below the Knock-in (KI) Barrier at 50%
What is the payoff for the trader?
  • Yield = daily yield for all 28 days = $1.79 * 28 = $50.1
  • Principal = $1000 returned
  • Total payoff = $1,050.1 after 28 days
  • ROI = $1050.1/$1000 = 5.01% in 28 days or 68.34% APY

Scenario 2: Normal expiry, spot closing below 100%

FCN: Scenario 2
What happens in this example scenario?
  • FCN start date = July 29, 2022
  • No knock-out or knock-in events therefore, the FCN reaches its full 28-day duration and expires as normal
  • The spot price of all underlying assets closed below 100%
  • None of the assets exceeded the Knock-out (KO) Barrier at 130% or fell below the Knock-in (KI) Barrier at 50%
What is the payoff for the trader?
  • Yield = daily yield for all 28 days = $1.79 * 28 = $50.1
  • Principal = $1000 returned
  • Total payoff = $1,050.1 after 28 days
  • ROI = $1050.1/$1000 = 5.01% in 28 days or 68.34% APY

Scenario 3: Knock-Out Event

FCN: Scenario 3
What happens in this example scenario?
  • FCN start date = July 29, 2022
  • Knock-out happens on the 20th day and expires the product
What is the payoff for the trader?
  • Yield = daily yield for all 20 days = $1.79 * 20 = $35.8
  • Principal = $1000 returned
  • Total payoff = $1,035.8 after 20 days
  • ROI = $1,035.8/$1000 = 3.58% yield in 20 days or 25.28% APY

Scenario 4: Knock-In Event

FCN: Scenario 4
What happens in this example scenario?
  • FCN start date = July 29, 2022
  • Knock-in event occurs on the 20th day
  • The knock-in event does not cause vaults to expire immediately, unlike knock-outs. It marks the vault as having been knocked in.
What is the payoff for the trader?
Because this vault has experienced a knock-in event during its lifetime, the principal returned when the vault expires is calculated using a formula based on the worst-performing asset on the final day.
The best part is that even in this worst-case scenario, the investor will be better off than directly investing in BTC or ETH. The yields earned on the FCN over 28 days will cushion the drawdown.
On Day 28, we see that ETH (49%) is the worst performing vs BTC (54%).
  • Yield = daily yield for 28 days = $1.79 * 28 = $50.1
  • Principal = $1000 initial deposit x min(100%,49%) = $1000 x 49% = $490 returned
  • Total payoff = $540.1 after 28 days
  • ROI = $540.1/$1000 = -45.9% yield in 28 days

Scenario 5 - Knock-in event, closing spot below 100%

FCN: Scenario 5
What happens in this example scenario?
  • FCN start date = July 29, 2022
  • Knock-in event occurs on the 12th day
  • The knock-in event does not cause vaults to expire immediately, unlike knock-outs. It marks the vault as having been knocked in.
What is the payoff for the trader?
Because this vault has experienced a knock-in event during its lifetime, the principal returned when the vault expires is calculated using a formula based on the worst-performing asset on the final day.
Even though ETH hit KI during the cycle, BTC was the worst-performing asset on the final day. On Day 28, we see that BTC (61%) is the worst performing vs ETH (71%).
  • Yield = daily yield for 28 days = $1.79 * 28 = $50.1
  • Principal = $1000 initial deposit x min(100%,61%) = $1000 x 61% = $610 returned
  • Total payoff = $660.1 after 30 days
  • ROI = $660.1/$1000 = -33.9% yield in 28 days

Scenario 6 - Knock-in event and Knock-out event, closing above KO

FCN: Scenario 6
What happens in this example scenario?
  • FCN start date = July 29, 2022
  • Knock-in event occurs on the 10th day, and the knock-out event occurs on the 24th day
  • The knock-in event does not cause vaults to expire immediately, unlike knock-outs. It marks the vault as having been knocked in.
What is the payoff for the trader?
Even though the vault experienced a knock-in event during its lifetime, it only expires earlier than normal due to the knock-out event, and traders are paid out immediately.
  • Yield = daily yield for 24 days = $1.79 * 24 = $43
  • Principal = $1000 returned
  • Total payoff = $1043 after 24 days
  • ROI = $1043/$1000 = 4.3% yield in 24 days or 43.1% APY

Scenario 7 - Knock-in event, closing spot above 100%

FCN: Scenario 7
What happens in this example scenario?
  • FCN start date = July 29, 2022
  • Even though ETH hit KI during the cycle, ETH and BTC ended above the spot price on the final day. So, traders will receive their entire capital back plus the fixed coupon for 28 days.
What is the payoff for the traders?
  • Yield = daily yield for all 28 days = $1.79 * 28 = $50.1
  • Principal = $1000 returned
  • Total payoff = $1,050.1 after 28 days
  • ROI = $1050.1/$1000 = 5.01% in 28 days or 68.34% APY