Do Perpetual Swaps Use Cash or Physical Settlement?

Structure ⎊ Non-Deliverable Forwards, within cryptocurrency derivatives, represent privately negotiated over-the-counter contracts referencing a future exchange rate between two currencies, one of which is typically a non-convertible or restricted currency like the Chinese Yuan or, increasingly, a stablecoin pegged to a fiat currency.

Settlement ⎊ Perpetual swaps settlement, within the context of cryptocurrency derivatives, represents the finalization of a contract where the difference between the initial notional value and the final settlement price is exchanged.

Settlement ⎊ In cryptocurrency derivatives and options trading, settlement denotes the culmination of a contract's lifecycle, representing the final exchange of assets or cash flows as dictated by the agreement's terms.

Delivery ⎊ This describes the actual transfer of the underlying cryptocurrency asset from the seller's wallet to the buyer's wallet upon the expiration or exercise of a derivative contract.

Mechanism ⎊ Perpetual contracts, fundamentally, represent agreements to buy or sell an asset at a specified future date, differing from traditional futures through the absence of an expiration date; this continuous settlement is achieved via a funding rate, exchanged between long and short positions to anchor the contract price to the underlying spot market.

Mechanism ⎊ Bitcoin perpetual swaps represent agreements to exchange cash flows based on the difference in price of Bitcoin between the contract’s inception and its expiration, or more accurately, its continued existence as these contracts lack a traditional settlement date.

Objective ⎊ Avoiding Physical Delivery is a core objective in the design and utilization of many financial derivatives, particularly futures and options contracts, where the intent is purely speculative or for hedging price risk.

Protocol ⎊ Physical settlement protocols are meticulously defined by the exchange or clearing house, detailing the exact time, price, and method of the underlying cryptocurrency transfer.

Mechanisms ⎊ ⎊ Decentralized finance trading instruments represent a paradigm shift in financial markets, enabling peer-to-peer exchange of crypto assets and derivatives without traditional intermediaries.

Execution ⎊ The process of maintaining a position in a perpetual swap involves continuous monitoring and adjustment, as these contracts lack a fixed maturity date for final settlement.