2️⃣Market risk measure (MRM)

A high volatility of the underlying assets leads to high impermanent loss due to arbitrage opportunities. Thus, the rating methodology leverages on the VaR equivalent Volatility (VeV) in order to define the market risk measure. This metric is a volatility-like measure associated to a value at risk (VaR) and is widely used in traditional finance. In a nutshell, it corresponds to the degree of variation of the underlying assets in a stressed scenario.

Moreover, the VeV is assigned to a market risk category ranging from a scale of 1 (low risk) to 7 (high risk):

VeV	MRM
< 5%	1
≥ 5% and < 10%	2
≥ 10% and < 15%	3
≥ 15% and < 30%	4
≥ 30% and < 45%	5
≥ 45% and < 80%	6
>80%	7

Table 1: Market risk measure (MRM).

And, each MRM corresponds to a grade as follows:

VeV	MRM	MRM
Prime quality	AAA	1
High quality	AA	2
Upper medium quality	A	3
Low medium quality	BBB	4
Speculative	BB	5
Highly speculative	B	6
Ultra speculative	CCC	7

Table 2: Rating scale.