Trade IRS

Trade Variable Yield

TL;DR: This guide shows you how to open a Variable Yield position — betting that VY will exceed the current Fixed Yield rate. Profitable when rates rise, but riskier than locking FY.

When to Trade Variable Yield

Open VY position when:

Scenario	Why Trade VY
You expect rates to rise	Bullish on DeFi activity
Current FY seems too high	Market mispricing opportunity
You want leveraged VY exposure	Amplify your yield returns
Hedging an FY position	Offset risk from another trade

Understanding VY Positions

The Trade

When you open a VY position:

┌─────────────────────────────────────────────────────────────┐
│                     VY POSITION                             │
├─────────────────────────────────────────────────────────────┤
│                                                             │
│   You GIVE UP:    Fixed Yield (guaranteed rate)             │
│   You RECEIVE:    Variable Yield (actual rate)              │
│                                                             │
│   Profit when:    VY > FY (actual beats guaranteed)         │
│   Loss when:      VY < FY (actual underperforms)            │
│                                                             │
└─────────────────────────────────────────────────────────────┘

Payoff Diagram

Profit/Loss
    ^
    │                                    /
    │                                   /
    │                                  /
    │                                 /
+$$ │                               /
    │                             /
    │                           /
────┼──────────────────────────/────────────────► VY (actual)
    │                        / FY = 6%
    │                      /
-$$ │                    /
    │                  /
    │                /
    
    The higher VY goes above FY, the more you profit
    The lower VY goes below FY, the more you lose

Pre-Trade Analysis

Step 1: Assess Rate Outlook

Ask yourself:

• Why do I think VY will rise?

• What's the catalyst (increased DeFi activity, market stress)?

• How high could VY realistically go?

Step 2: Check Current Rates

// Get current Fixed Yield
const [tick, sqrtPriceX96] = await vammManager.getVAMMState(poolId);
const currentFY = Math.pow(1.0001, Number(tick)) * 100;

// Get current Variable Yield
const currentVY = await aprOracle.getOnAprRay(aUSDC_ADDRESS);
const vyPercent = Number(currentVY) / 1e27 * 100;

console.log(`Current Fixed Yield:    ${currentFY.toFixed(2)}%`);
console.log(`Current Variable Yield: ${vyPercent.toFixed(2)}%`);
console.log(`Spread (VY - FY):       ${(vyPercent - currentFY).toFixed(2)}%`);

Step 3: Scenario Analysis

function calculateVYPositionPnL(notional, termDays, givenUpFY, actualVY) {
    const timeInYears = termDays / 365;
    // VY position profits when VY > FY
    const pnl = (actualVY - givenUpFY) / 100 * notional * timeInYears;
    return pnl;
}

const notional = 100000;
const termDays = 90;
const givenUpFY = 6;

console.log("VY Position Scenarios:");
console.log(`VY = 4%:  PnL = $${calculateVYPositionPnL(notional, termDays, givenUpFY, 4).toFixed(2)}`);
console.log(`VY = 6%:  PnL = $${calculateVYPositionPnL(notional, termDays, givenUpFY, 6).toFixed(2)}`);
console.log(`VY = 8%:  PnL = $${calculateVYPositionPnL(notional, termDays, givenUpFY, 8).toFixed(2)}`);
console.log(`VY = 12%: PnL = $${calculateVYPositionPnL(notional, termDays, givenUpFY, 12).toFixed(2)}`);

Output:

VY Position Scenarios:
VY = 4%:  PnL = $-493.15
VY = 6%:  PnL = $0.00
VY = 8%:  PnL = $493.15
VY = 12%: PnL = $1479.45

Opening the Position

Step 1: Deposit Margin

// VY positions may need more margin due to unlimited downside
const notional = ethers.parseUnits("100000", 6);
const marginAmount = notional / 5n;  // 20% margin for safety

// Approve and deposit
await usdc.approve(COLLATERAL_ENGINE, marginAmount);
await collateralEngine.updateAccountMargin(account, USDC, marginAmount);
console.log(`Deposited ${ethers.formatUnits(marginAmount, 6)} USDC margin`);

Step 2: Execute the Swap

const MAX_SQRT_RATIO = 1461446703485210103287273052203988822378723970342n;
const MIN_TICK = -887270;
const MAX_TICK = 887270;

// Trade Variable Yield = POSITIVE amountSpecified
const notional = ethers.parseUnits("100000", 6);

const tx = await vammManager.swap(
    [
        poolKey.underlyingAsset,
        poolKey.compoundToken,
        poolKey.termStartTimestampWad,
        poolKey.termEndTimestampWad,
        poolKey.feeWad,
        poolKey.tickSpacing
    ],
    {
        account: [account.owner, account.id, account.isolatedMarginToken],
        amountSpecified: notional,  // POSITIVE = Trade Variable Yield
        sqrtPriceLimitX96: MAX_SQRT_RATIO - 1n,  // Max price (min FY we'd give up)
        tickLower: MIN_TICK,
        tickUpper: MAX_TICK
    }
);

const receipt = await tx.wait();
console.log("VY position opened:", receipt.hash);

Step 3: Verify Position

// Check the result
console.log("Position Details:");
console.log(`Fixed Token Delta: ${fixedTokenDelta}`);
console.log(`Variable Token Delta: ${variableTokenDelta}`);

// For VY position:
// fixedTokenBalance: NEGATIVE (you give up FY)
// variableTokenBalance: POSITIVE (you receive VY)

Risk Management for VY Positions

Higher Risk Profile

VY positions have theoretically unlimited downside:

Risk Comparison:
━━━━━━━━━━━━━━━━

FY Position:
  Max loss = FY rate (e.g., 6%) × notional × time
  VY could go to 100%, you still only gave up 6%

VY Position:
  Max loss = Unlimited (VY could drop to 0%)
  If VY = 0%, you lose full FY rate
  Real risk: VY dropping significantly below FY

Protective Measures

1. Higher margin ratio

// Use 15-20% margin instead of 5-10%
const marginRatio = 0.20;
const margin = notional * marginRatio;

1. Smaller position sizes

// Don't put more than 20% of portfolio in VY positions
const maxVYExposure = totalPortfolio * 0.20;

1. Set mental stop-losses

If unrealized loss > X% of margin:
  → Close position to limit damage

Monitoring VY Positions

Track Variable Yield

async function getCurrentVY(compoundToken) {
    const aprRay = await aprOracle.getOnAprRay(compoundToken);
    return Number(aprRay) / 1e27 * 100;  // Convert to percentage
}

// Monitor regularly
setInterval(async () => {
    const vy = await getCurrentVY(aUSDC_ADDRESS);
    const givenUpFY = 6;  // Your locked rate
    
    console.log(`Current VY: ${vy.toFixed(2)}%`);
    console.log(`Your FY: ${givenUpFY.toFixed(2)}%`);
    console.log(`Spread: ${(vy - givenUpFY).toFixed(2)}%`);
    
    if (vy < givenUpFY) {
        console.log("⚠️ VY below your FY - position in loss");
    } else {
        console.log("✓ VY above your FY - position in profit");
    }
}, 3600000);  // Check every hour

Check Health Factor

async function monitorHealth() {
    try {
        const marginReq = await collateralEngine.checkMarginRequirement(account);
        const marginBalance = await collateralEngine.getAccountMargin(account, USDC);
        
        const healthFactor = Number(marginBalance) / Number(marginReq);
        
        console.log(`Health Factor: ${healthFactor.toFixed(2)}`);
        
        if (healthFactor < 1.5) {
            console.log("⚠️ Consider adding margin!");
        }
    } catch (error) {
        console.log("❌ Position may be at risk!");
    }
}

Closing VY Position Early

Close to Lock in Profits

If VY has been high and you want to lock in gains:

// Close VY position = open opposite FY position
// NEGATIVE amountSpecified closes your VY position

const notionalToClose = ethers.parseUnits("100000", 6);

await vammManager.swap(
    poolKeyArray,
    {
        account: accountTuple,
        amountSpecified: -notionalToClose,  // NEGATIVE = close VY
        sqrtPriceLimitX96: MIN_SQRT_RATIO + 1n,
        tickLower: MIN_TICK,
        tickUpper: MAX_TICK
    }
);

console.log("VY position closed, profits locked in");

Close to Cut Losses

If VY is dropping and you want to limit losses:

// Same as above, but motivation is loss mitigation
await vammManager.swap(
    poolKeyArray,
    {
        account: accountTuple,
        amountSpecified: -notionalToClose,
        sqrtPriceLimitX96: MIN_SQRT_RATIO + 1n,
        tickLower: MIN_TICK,
        tickUpper: MAX_TICK
    }
);

console.log("VY position closed, losses limited");

Settlement at Maturity

VY positions settle the same way as FY positions:

// After maturity
await collateralEngine.settlePosition(account, poolKey);

const finalBalance = await collateralEngine.getAccountMargin(account, USDC);
console.log(`Final Balance: ${ethers.formatUnits(finalBalance, 6)} USDC`);

VY Position Strategies

1. Rate Spike Play

Strategy: VY typically spikes during market stress

1. Monitor for market stress indicators
2. Open VY position when stress begins
3. VY spikes as borrowing demand increases
4. Close position or hold to maturity

2. Carry Trade

Strategy: If current VY > FY, capture the spread

1. Check VY > FY (positive carry)
2. Open VY position
3. As long as VY stays above FY, you profit
4. Risk: VY drops below FY

3. Hedge Lending Exposure

Strategy: Hedge your Aave deposits

1. You have 100k USDC in Aave earning VY
2. Worried VY might drop
3. Open FY position to lock in current rates
4. (This is actually an FY position, not VY)

Key Takeaways

1. Positive amountSpecified = Trade Variable Yield

2. Profit when VY > FY — You benefit from rising rates

3. Higher risk — VY positions have more downside

4. Use more margin — 15-20% instead of 5-10%

5. Monitor actively — VY positions need attention

Next Steps

• Lock Fixed Yield — The opposite position

• Provide Liquidity — Earn fees from traders

• Risk Management — Manage VY risk