## Arbitrage

Broadly speaking, arbitrage is a type of trading strategy where one utilises market inefficiencies to realise profits. The simplest example is a situation where company XYZ's shares trade at $98 in New York and $102 in London. One would then buy XYZ shares in New York and sell them in London, profiting $4/share. As well as this simple form of arbitrage, Skye Crypto specialises in more complex forms of arbitrage, using cryptocurrency derivatives, which are much more profitable.

## Derivatives

A financial derivative is a type of financial asset whose price depends, is "derived" from, the price of another asset. Essentially they are different types of bets on the future performance of the so called underlying asset. A plethora of derivates exist in the fiat world but on the crypto side the types provided are more limited. Skye Crypto mainly uses Options, Futures and Swaps.

## Option

An option is a type of financial derivative. An option buyer pays the smeller a small premium for the right, but not obligation, to buy an asset from the seller at a future date for a fixed price, called the "strike price". For example, let's say that A believes that a stock X, which currently sells for $90, will trade comfortably above $100 in a months time and that B does not share this view. Then B might agree to write an option on X to A with a $100 strike price, with an expiry date 1 month in the future. A would then pay a premium of say $2 to B and if one month later X trades at $105, A can exercise the option and buy the share from B for $100, making a $5 profit. Accounting for the $2 premium his net profit is $3, on an investment of $2. If on the other hand X stays below $100, A will not be interested in buying the share for $100 and he will not exercise his option, losing his $2 investment.

## Future

A future is a type of derivative where the seller agrees to sell and the buyer agrees to buy an asset at a future date, for a price determined now. Unlike options, both parties are contractually obliged to carry out the trade.

## Swap

A swap is similar to a future but without the need to have a set expiry date. Instead, both parties continuously pay each other at regular intervals, based on the interest rate differential between assets being swapped and other criteria defined in the contract, until one party leaves the contract. A traditional fiat swap contract is typically similar to a mutual loan in two different currencies. Each party borrows an amount from the other and pays interest.

## Spot price

A spot price is the current price of an asset, e.g. Bitcoin, as opposed to e.g. a future price at a particular time.

## Underlying asset

The underlying asset of a derivative is the asset that its price depends on. In the case of an option on ETH the underlying asset is ETH.

## USD Denominated

The Skye Crypto Fund is USD denominated. This means that its return is calculated in USD terms, and its value will remain stable relative to the dollar. Our 5% monthly return target is also calculated in USD.

## Intrinsic value

At any given time the Fund owns a number of crypto assets and just like a share, each SCP token represents ownership of a fraction of these assets. The intrinsic value of one token is equal to the total value of all assets divided by the total number of tokens in circulation. When first issued the intrinsic value of each token is $1 and this value will increase as the assets generate returns.

## Fiat money

Fiat money is traditional money that is issued by a country's central bank, such as U.S. dollars, or Japanese yen. Here, the term "fiat" is typically used to refer to non-crypto currencies.

## Hedging

An investor that takes on positions that guard him from a current or future risk is said to hedge that risk. For example, an investor might have agreed to buy a certain amount of oil at some future date, for a certain price in dollars per barrel. If this investor wants to lock in the cost in Euro terms he can hedge his dollar risk by using Euros to buy the dollars he will later need to pay for the oil. This way his oil purchase will not cost him more in Euro terms if the Dollar strengthens against the Euro, but he also will not save money if the opposite happens.