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description: High level overview of how premiums are computed
---

# Premium Model

Premiums paid by borrowers and traders are determined by scaling and multiplying the following two variables **for each borrowed tick.**

1. Interest component, determined by utilization rates of the tick borrowed
2. Option premiums component, determined by the absolute distance of the current price to the borrowed tick

### Interest&#x20;

<figure><img src="https://20107516-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FhzaQpygyckQc1GpfmDWt%2Fuploads%2FO4AWRl8aEa3XuY8dcp1M%2FKakaoTalk_Photo_2023-12-29-23-11-02%20003.png?alt=media&#x26;token=61018fed-f202-424a-9625-b75eb81e7997" alt=""><figcaption></figcaption></figure>

The interest by traders and borrowers is a function of the utilization rate of the borrowed ticks. The pivot rate is the utilization rate at which the rate of increase of interest increases.&#x20;

Each tick maps to a utilization rate. When multiple ticks are borrowed, the interest for each of the borrowed ticks will vary, and their sum will be quoted to the borrower.&#x20;

### Options Premium

The options premiums component is determined by how far away the borrowed price range is relative to the current price.&#x20;

This approach guarantees that the premiums received by LPs reflect the IL risk they undertake; lending closer to the current price increases the likelihood of the position being 'in the money', prompting them, as risk sellers, to demand higher prices for these riskier positions.

When multiple ticks are borrowed, the premiums component for each of the borrowed ticks will vary, and their sum will be quoted to the borrower. &#x20;

<figure><img src="https://20107516-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2FhzaQpygyckQc1GpfmDWt%2Fuploads%2FkAgLifwcPMgGXQ5zZoHB%2FKakaoTalk_Photo_2023-12-29-23-11-02%20007.png?alt=media&#x26;token=ce3c97ac-4fa9-4ad8-ad45-df57af0be873" alt=""><figcaption><p>Premiums are high around borrowed range</p></figcaption></figure>

### What this means for traders

* In general, the higher your leverage of your position, the higher your premiums quoted, and vice versa.&#x20;
* The closer the current price is to your borrowed range, (shown on the frontend) the higher your premiums quoted, and vice versa.&#x20;
* The more utilized(more demand) your borrowed tick ranges, the higher your premiums quoted, and vice versa

### What this means for LPs

* The closer your position range is to current prices, the higher your yield, in exchange for increased IL risk.&#x20;
* The more utilized your position range, the higher your yield, in exchange for increased liquidity risk(limited withdrawals when fully utilized).&#x20;









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