Fixed Yield vs Variable Yield

TL;DR: XCCY offers two position types — FY Positions for locking guaranteed yield, and VY Positions for gaining leveraged exposure to variable rates. Choose based on your outlook and risk tolerance.

The Two Sides of Every Trade

Every trade in XCCY has two participants:

┌─────────────────────────────────────────────────────────────┐
│                                                             │
│    FY Position                      VY Position             │
│    (Lock Fixed Yield)               (Trade Variable Yield)  │
│                                                             │
│    ┌───────────────┐               ┌───────────────┐       │
│    │ Receives: FY  │◄─── SWAP ────►│ Receives: VY  │       │
│    │ Gives up: VY  │               │ Gives up: FY  │       │
│    └───────────────┘               └───────────────┘       │
│                                                             │
│    "I want certainty"              "I expect VY > FY"       │
│                                                             │
└─────────────────────────────────────────────────────────────┘

Key insight: For every person who locks Fixed Yield, someone else is taking the Variable Yield exposure.

FY Position (Lock Fixed Yield)

What It Is

An FY Position locks in a guaranteed yield rate for the term of the contract. You give up whatever Variable Yield turns out to be, in exchange for certainty.

Mechanics

Opening an FY Position:
━━━━━━━━━━━━━━━━━━━━━━━━

1. You deposit margin (collateral)
2. You specify notional amount
3. You receive Fixed Yield at current market rate
4. At maturity, you settle based on FY vs VY

Settlement:
  If FY > VY → You PROFIT
  If FY < VY → You LOSE
  If FY = VY → Break even

Example

Parameter	Value
Notional	50,000 USDC
Term	90 days
Fixed Yield (locked)	6% APY
Margin deposited	2,500 USDC

Scenario A: VY averages 4%

PnL = (6% - 4%) × 50,000 × (90/365)
PnL = 2% × 50,000 × 0.247
PnL = +$247 profit ✓

Scenario B: VY averages 9%

PnL = (6% - 9%) × 50,000 × (90/365)
PnL = -3% × 50,000 × 0.247
PnL = -$370 loss ✗

When to Use FY Positions

Use Case	Why
Treasury management	Know exactly what you'll earn
Lock high rates	VY spiked temporarily — capture it
Bearish on rates	You expect VY to drop
Risk aversion	You prefer certainty over potential upside

Risks

1. Opportunity cost: If VY exceeds FY, you miss out

2. Margin requirements: Must maintain sufficient collateral

3. Liquidation risk: If losses approach your margin

VY Position (Trade Variable Yield)

What It Is

A VY Position gives you exposure to Variable Yield. You give up a guaranteed Fixed Yield rate in exchange for whatever the actual VY turns out to be.

Mechanics

Opening a VY Position:
━━━━━━━━━━━━━━━━━━━━━━━━

1. You deposit margin (collateral)
2. You specify notional amount
3. You give up Fixed Yield at current market rate
4. At maturity, you settle based on VY vs FY

Settlement:
  If VY > FY → You PROFIT
  If VY < FY → You LOSE
  If VY = FY → Break even

Example

Parameter	Value
Notional	50,000 USDC
Term	90 days
Fixed Yield (given up)	6% APY
Margin deposited	2,500 USDC

Scenario A: VY averages 9%

PnL = (9% - 6%) × 50,000 × (90/365)
PnL = 3% × 50,000 × 0.247
PnL = +$370 profit ✓

Scenario B: VY averages 4%

PnL = (4% - 6%) × 50,000 × (90/365)
PnL = -2% × 50,000 × 0.247
PnL = -$247 loss ✗

When to Use VY Positions

Use Case	Why
Bullish on rates	You expect VY to rise above current FY
Leveraged yield exposure	Amplify your VY returns with margin
Rate speculation	Trade rate movements
Hedging	Offset an FY position or lending exposure

Risks

1. Rate drop risk: If VY falls below FY, you lose

2. Unlimited downside: VY could theoretically go to 0%

3. Margin requirements: Must maintain sufficient collateral

Side-by-Side Comparison

Aspect	FY Position	VY Position
You receive	Fixed Yield (guaranteed)	Variable Yield (actual)
You give up	Variable Yield (actual)	Fixed Yield (guaranteed)
Profit when	VY < FY	VY > FY
Loss when	VY > FY	VY < FY
Best for	Certainty seekers	Rate bulls
Risk profile	Capped upside, protected downside	Unlimited upside, unlimited downside
Technical	Negative amountSpecified	Positive amountSpecified

Visual: Payoff at Settlement

Profit/Loss
    ^
    │
+$$ │         FY Position          VY Position
    │              ╲                    ╱
    │               ╲                  ╱
────┼────────────────╲────────────────╱───────────> VY (actual)
    │                 ╲              ╱
    │                  ╲            ╱
-$$ │                   ╲__________╱
    │
    │            (FY locked at 6%)

• FY Position: Profits as VY drops below 6%, loses as VY rises above 6%

• VY Position: Profits as VY rises above 6%, loses as VY drops below 6%

Choosing Your Position

                    ┌─────────────────────────┐
                    │   What's your outlook   │
                    │      on VY rates?       │
                    └───────────┬─────────────┘
                                │
              ┌─────────────────┼─────────────────┐
              │                 │                 │
              ▼                 ▼                 ▼
        VY will DROP      UNCERTAIN        VY will RISE
              │                 │                 │
              ▼                 ▼                 ▼
      ┌───────────────┐ ┌─────────────┐ ┌───────────────┐
      │ FY Position   │ │   Consider  │ │ VY Position   │
      │ Lock Fixed    │ │   staying   │ │ Trade Var.    │
      │ Yield         │ │   flexible  │ │ Yield         │
      └───────────────┘ └─────────────┘ └───────────────┘

Key Takeaways

1. FY Positions lock in certainty — you know what you'll earn

2. VY Positions bet on rate increases — higher risk, higher potential reward

3. Every trade has two sides — FY and VY positions are always balanced

4. Choose based on your outlook — rate expectations drive position choice

5. Mind your margin — both positions require collateral

Next Steps

• How IRS Works — Full mechanics explained

• Lock Fixed Yield — Open an FY position

• Trade Variable Yield — Open a VY position