Time-Weighted Average Price (TWAP) calculates an exchange rate by taking the average price over a set period, giving equal weight to each data point. For example, a 5-day TWAP means the exchange rate is the simple average of rates recorded over the past five days.
Example:
- Day 1: $1.00
- Day 2: $1.05
- Day 3: $1.10
- Day 4: $1.00
- Day 5: $1.15
TWAP = ($1.00 + $1.05 + $1.10 + $1.00 + $1.15) / 5 = $1.06
When to use TWAP:
- When you prefer consistency and predictability.
- When recent volatility isn't your primary concern.
- Ideal for hedging and regular recurring payments.
TWAP vs TRWAP: Key Differences
- Weighting: TWAP uses equal weighting across all days, while TRWAP emphasizes recent days.
- Responsiveness: TRWAP responds quicker to market changes, ideal in volatile markets. TWAP offers stability by smoothing out short-term fluctuations.
Choosing Between TWAP and TRWAP
Ask yourself:
- Is market volatility significant? Consider TRWAP.
- Do you prefer stability and predictable budgeting? Consider TWAP.
Understanding these differences helps you make informed, strategic financial decisions aligned with your business or trading objectives.