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)
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
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:
📚 Next Steps
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