Exercise 3: Risk Assessment and IL Analysis

⏰ Time Investment: 45-60 minutes 🎯 Goal: Master impermanent loss calculations and risk assessment

📚 Required Reading Integration 📖 Primary: Lesson 3: Impermanent Loss and Risk Fundamentals 📖 Supporting: Lesson 2: The Mathematics of Liquidity Provision

🔍 Phase 1: IL Calculation Practice (20 minutes)

Risk Assessment Matrix

IL vs Fees Break-Even Chart

IL Calculation Worksheet

Basic IL Scenarios

Scenario: You deposit 1 ETH + 2,000 USDC when ETH = $2,000

• Total value: $4,000

• Pool ratio: 50/50

Exercise 1: Calculate IL for different price movements

Price Change: +25% (ETH → $2,500)

Step 1: Calculate new pool ratio

• New price ratio: _____

• Your new position: _____ ETH + _____ USDC

Step 2: Calculate values

• LP position value: $_____

• Holding value: $_____

• IL: $_____ (_____%)

Price Change: +50% (ETH → $3,000)

• LP value: $_____

• Holding value: $_____

• IL: $_____ (_____%)

Price Change: +100% (ETH → $4,000)

• LP value: $_____

• Holding value: $_____

• IL: $_____ (_____%)

Price Change: -50% (ETH → $1,000)

• LP value: $_____

• Holding value: $_____

• IL: $_____ (_____%)

IL Formula Application

Exercise 2: Use IL formula for price ratio r

Formula: IL% = 2 × (√r / (1 + r)) - 1

Calculate for r = 1.5 (50% increase):

• IL% = 2 × (√1.5 / (1 + 1.5)) - 1

• IL% = 2 × (_____ / _____) - 1

• IL% = _____%

Calculate for r = 2.0 (100% increase):

• IL% = _____

Calculate for r = 0.5 (50% decrease):

• IL% = _____

📊 Phase 2: IL vs. Fees Analysis (15 minutes)

Break-Even Analysis

Scenario: ETH/USDC pool

• Your capital: $10,000

• Daily volume: $100,000

• Fee rate: 0.3%

• Your share: 1%

Calculate:

Daily Fees:

• Daily fees = $100,000 × 0.003 × 0.01 = $_____

Annual Fees (before IL):

• Annual = $_____ × 365 = $_____

IL Scenarios:

If ETH moves ±25%:

• IL = 2% = $_____

• Net return = $_____ - $_____ = $_____

• Profitable? _____ (Yes/No)

If ETH moves ±50%:

• IL = 5.7% = $_____

• Net return = $_____ - $_____ = $_____

• Profitable? _____ (Yes/No)

If ETH moves ±100%:

• IL = 20% = $_____

• Net return = $_____ - $_____ = $_____

• Profitable? _____ (Yes/No)

Conclusion: This position is profitable only if ETH moves <_____%.

Risk Assessment Matrix

Exercise 3: Assess risk for different pairs

Pair	Volatility	Expected IL	Fees	Net Return	Risk Level
USDC/USDT	Low	_____%	_____%	_____%	_____
wstETH/ETH	Medium	_____%	_____%	_____%	_____
ETH/USDC	High	_____%	_____%	_____%	_____
MEME/USDC	Very High	_____%	_____%	_____%	_____

💡 Phase 3: LVR Understanding (10 minutes)

LVR vs. IL Comparison

Key Differences:

Impermanent Loss:

• Reversible? _____ (Yes/No)

• When does it occur? _____

• How to minimize? _____

Loss Versus Rebalancing:

• Reversible? _____ (Yes/No)

• When does it occur? _____

• How to minimize? _____

LVR Impact Analysis

Scenario: High volatility pair (σ = 50% annual)

LVR Formula: LVR = σ² / 8

Calculate:

• LVR = (0.5)² / 8 = _____ / 8 = _____%

Annual Impact:

• On $10,000 position: $_____ lost to LVR

• This is _____ (reversible/irreversible)

Conclusion: In high volatility, LVR can exceed fees, making LPing unprofitable.

🎯 Phase 4: Risk Management Framework (15 minutes)

Position Risk Assessment

Your Portfolio: $50,000 total

Current Positions:

• Position 1: $10,000 ETH/USDC (volatile)

• Position 2: $15,000 USDC/USDT (stable)

• Position 3: $10,000 wstETH/ETH (correlated)

• Position 4: $15,000 MEME/USDC (very volatile)

Risk Analysis:

Position 1:

• % of portfolio: _____%

• Risk level: _____

• Expected IL: _____%

• Within limits? _____ (Yes/No)

Position 2:

• % of portfolio: _____%

• Risk level: _____

• Expected IL: _____%

• Within limits? _____ (Yes/No)

Position 3:

• % of portfolio: _____%

• Risk level: _____

• Expected IL: _____%

• Within limits? _____ (Yes/No)

Position 4:

• % of portfolio: _____%

• Risk level: _____

• Expected IL: _____%

• Within limits? _____ (Yes/No)

Portfolio Risk:

• Total at risk: $_____

• % of portfolio: _____%

• Diversified? _____ (Yes/No)

• Risk limits met? _____ (Yes/No)

Risk Mitigation Plan

Identify your highest risk position: Position _____

Mitigation strategies:

Action items:

• Reduce position size to _____%

• Switch to lower volatility pair

• Implement hedging strategy

• Set IL alert at _____%

📚 Next Steps

• Calculate IL for your actual positions

• Set up IL monitoring (APY.vision recommended)

• Review risk limits monthly

• Practice IL calculations with different scenarios

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