# How AgoraDesk Eliminates Counterparty Risk in Option Trades

Counterparty risk, put simply, is the risk that the other side in the option trade will not fulfill their obligations.

##### Call Trades

In the case of a call trade, the counterparty risk is either due to the call buyer not paying the premium or due to the fact that when the call option is exercised by the call buyer, the call seller may not deliver the promised amount of the underlying asset.

AgoraDesk eliminates both of these risks through our escrow mechanism. For example, if Alice is buying Bob’s call option for an underlying 1 BTC and needs to pay a premium of 100 USD to Bob’s bank account, AgoraDesk escrows 1 BTC from Bob’s AgoraDesk wallet balance as soon as the trade is opened. Then, Alice asks for Bob’s bank account details and transfers the money. If Bob doesn’t receive it, he opens a dispute and an AgoraDesk staff member will step in to determine whether Bob received the money. If he didn’t, then AgoraDesk will cancel the trade and the escrow is released back to Bob.

If Alice did transfer the premium and Bob confirms it, the option trade enters into its active stage and Alice is able to exercise the option at any time before the expiration date. If she doesn’t, the escrow is returned to Bob and that concludes the trade. If she does, then the relevant amount of the underlying asset is released from the escrow to her, and that concludes the trade. Even if Bob disappeared, he would have no way to not fulfill his obligations, since AgoraDesk escrowed the entire underlying amount.

AgoraDesk eliminates both of these risks through our escrow mechanism. For example, if Alice is buying Bob’s call option for an underlying 1 BTC and needs to pay a premium of 100 USD to Bob’s bank account, AgoraDesk escrows 1 BTC from Bob’s AgoraDesk wallet balance as soon as the trade is opened. Then, Alice asks for Bob’s bank account details and transfers the money. If Bob doesn’t receive it, he opens a dispute and an AgoraDesk staff member will step in to determine whether Bob received the money. If he didn’t, then AgoraDesk will cancel the trade and the escrow is released back to Bob.

If Alice did transfer the premium and Bob confirms it, the option trade enters into its active stage and Alice is able to exercise the option at any time before the expiration date. If she doesn’t, the escrow is returned to Bob and that concludes the trade. If she does, then the relevant amount of the underlying asset is released from the escrow to her, and that concludes the trade. Even if Bob disappeared, he would have no way to not fulfill his obligations, since AgoraDesk escrowed the entire underlying amount.

##### Put Trades

In the case of a put trade, the counterparty risk is either due to the put buyer not paying the premium or due to the fact that when the put option is exercised by the put buyer, the put seller does not honor the obligation to buy the underlying asset.

AgoraDesk eliminates both of these risks through our escrow mechanism and the use of a cover payment. The cover payment is basically two payments condensed (or “netted”) into one. In a put option, the put seller is obligated to buy the put buyer’s underlying asset for the notional value of the contract. The put buyer is obligated to pay a non-refundable premium. Instead of these two separate payments, AgoraDesk achieves the same effect by simply requiring the put seller at the beginning of the trade to pay the put buyer the notional value minus the premium. This way, the put buyer receives payment for their underlying asset at the very start of the trade, and the put seller has no way of disappearing without fulfilling their obligations to the put buyer, since they effectively fulfill their obligations at the very start of the trade. At the end, if the put option expires, the put seller will receive the notional value’s worth of the underlying asset from the escrow, and the rest of the escrow is returned to the put buyer. If the put option is exercised, the full escrow is simply released to the put seller.

For example, if Alice is buying Bob’s put option for an underlying 20 XMR with a notional value of 1000 EUR (i.e. the exercise price is 50 EUR per XMR) and a premium of 100 EUR, the entire 20 XMR get escrowed from Alice’s AgoraDesk wallet balance as the trade starts. After that, Bob asks Alice for her bank account details and makes the cover payment of (notional – premium) EUR, in this case (1000 – 100) = 900 EUR to Alice’s bank account. If Alice doesn’t receive the payment, she can open a dispute and an AgoraDesk staff member will step in to determine whether Alice received the money. If she didn’t, then AgoraDesk will cancel the trade and the escrow will be released back to Alice.

If Bob transfers the cover payment and Alice confirms it, the option trade enters into its active stage and Alice is able to exercise the option at any time before the expiration date. If she doesn’t, this means that the market value of the escrowed underlying 20 XMR is now higher than the notional value of 1000 EUR. If, for example, the market value of the 20 XMR rose to 1250 EUR (i.e. 1 XMR = 62.5 EUR) at the time of the option’s expiration, Bob is given 1000 EUR (the notional value of the option) worth of XMR from the escrow, in this case (1000 / 62.5) = 16 XMR. So, Bob started by giving Alice 900 EUR, and ended with 16 XMR valued at 1000 EUR, therefore Bob profits the 100 EUR premium. The rest of the escrowed underlying, in this case (20 – 16) = 4 XMR, is returned to Alice. Alice received 900 EUR at the start of the trade as the cover payment from Bob, and she ends the trade with 4 XMR valued at 250 EUR, meaning her assets have a total worth of 1150 EUR, which is precisely the value appreciation of the underlying XMR minus the premium she had to pay for the option.

If, on the other hand, the value of the escrowed 20 XMR goes below the notional value of 1000 EUR, Alice exercises the option (i.e. “sells” her underlying), and the full escrow of 20 XMR is simply released to Bob. Alice has no way to exercise the option without the escrow being released to Bob, so Bob is never under risk that the underlying asset won’t be delivered to him.

AgoraDesk eliminates both of these risks through our escrow mechanism and the use of a cover payment. The cover payment is basically two payments condensed (or “netted”) into one. In a put option, the put seller is obligated to buy the put buyer’s underlying asset for the notional value of the contract. The put buyer is obligated to pay a non-refundable premium. Instead of these two separate payments, AgoraDesk achieves the same effect by simply requiring the put seller at the beginning of the trade to pay the put buyer the notional value minus the premium. This way, the put buyer receives payment for their underlying asset at the very start of the trade, and the put seller has no way of disappearing without fulfilling their obligations to the put buyer, since they effectively fulfill their obligations at the very start of the trade. At the end, if the put option expires, the put seller will receive the notional value’s worth of the underlying asset from the escrow, and the rest of the escrow is returned to the put buyer. If the put option is exercised, the full escrow is simply released to the put seller.

For example, if Alice is buying Bob’s put option for an underlying 20 XMR with a notional value of 1000 EUR (i.e. the exercise price is 50 EUR per XMR) and a premium of 100 EUR, the entire 20 XMR get escrowed from Alice’s AgoraDesk wallet balance as the trade starts. After that, Bob asks Alice for her bank account details and makes the cover payment of (notional – premium) EUR, in this case (1000 – 100) = 900 EUR to Alice’s bank account. If Alice doesn’t receive the payment, she can open a dispute and an AgoraDesk staff member will step in to determine whether Alice received the money. If she didn’t, then AgoraDesk will cancel the trade and the escrow will be released back to Alice.

If Bob transfers the cover payment and Alice confirms it, the option trade enters into its active stage and Alice is able to exercise the option at any time before the expiration date. If she doesn’t, this means that the market value of the escrowed underlying 20 XMR is now higher than the notional value of 1000 EUR. If, for example, the market value of the 20 XMR rose to 1250 EUR (i.e. 1 XMR = 62.5 EUR) at the time of the option’s expiration, Bob is given 1000 EUR (the notional value of the option) worth of XMR from the escrow, in this case (1000 / 62.5) = 16 XMR. So, Bob started by giving Alice 900 EUR, and ended with 16 XMR valued at 1000 EUR, therefore Bob profits the 100 EUR premium. The rest of the escrowed underlying, in this case (20 – 16) = 4 XMR, is returned to Alice. Alice received 900 EUR at the start of the trade as the cover payment from Bob, and she ends the trade with 4 XMR valued at 250 EUR, meaning her assets have a total worth of 1150 EUR, which is precisely the value appreciation of the underlying XMR minus the premium she had to pay for the option.

If, on the other hand, the value of the escrowed 20 XMR goes below the notional value of 1000 EUR, Alice exercises the option (i.e. “sells” her underlying), and the full escrow of 20 XMR is simply released to Bob. Alice has no way to exercise the option without the escrow being released to Bob, so Bob is never under risk that the underlying asset won’t be delivered to him.

##### Final Notes

It is important to note that if the traders use a reversible payment method, such as PayPal, then there is always the possibility that after the option trade concludes the payee might reverse the payment, and the other side will suffer a loss that AgoraDesk will not be able to recover.

Finally, escrow protection will be forfeit if the side that is receiving the payment confirms receiving the payment before actually receiving it. Scammers will often try to trick the other side into confirming the payment early. Never, under any circumstances, confirm receiving a payment before actually receiving it and making sure that everything is in order.

Finally, escrow protection will be forfeit if the side that is receiving the payment confirms receiving the payment before actually receiving it. Scammers will often try to trick the other side into confirming the payment early. Never, under any circumstances, confirm receiving a payment before actually receiving it and making sure that everything is in order.