Does a Significant Deviation between the Index Price and the Contract Price Always Trigger a Liquidation?
No, a deviation between the Index Price and the contract's Last Traded Price does not directly trigger liquidation. Liquidation is triggered when the Mark Price, which is based on the Index Price, causes the position's equity to fall below the maintenance margin.
A large deviation will, however, lead to a high funding rate, which incentivizes arbitrage and pushes the contract price back towards the Index Price.
Glossar
Deviation
Variance ⎊ Deviation, within cryptocurrency, options, and derivatives, represents the squared difference between an observed value and its expected value, quantifying the dispersion of potential outcomes around a central tendency.
Index Price
Derivation ⎊ Index price construction for crypto derivatives requires selecting a representative basket of underlying assets and calculating a weighted average based on established market capitalization or volume metrics.
Contract Price
Definition ⎊ Contract price refers to the agreed-upon price at which a derivative contract, such as an option or future, is bought or sold.