RMM Risk
Replication error between a target covered-call payoff and pool behavior.
#Risk mechanism
An RMM relies on a model, reserve function and arbitrage to trace a payoff. Discrete trading, fees, jumps and capital constraints keep realized inventory from matching the continuous target exactly.
#Stress conditions
- Delayed or absent arbitrage.
- Volatility input diverges from the market.
- Reserve state approaches a boundary.
- Fee regime obstructs rebalancing.
- Large gap near expiry.
#Control principles
- Publish invariant domains and numerical bounds.
- Simulate adversarial paths and report replication error.
- Bound reserve concentration and unsupported states.
- Specify terminal inventory treatment.
- Separate LP loss modes from user payoff claims.