How Do Arbitrageurs Utilize the Funding Rate Mechanism?
Arbitrageurs seek to profit from the temporary misalignment between the perpetual contract price and the spot price, often by exploiting the funding rate. For example, if the funding rate is highly positive, an arbitrageur might short the perpetual contract and simultaneously buy the equivalent amount of the spot asset.
They collect the funding rate payment while the combined position is hedged, profiting from the rate itself.
Glossar
Arbitrageurs
Action ⎊ Arbitrageurs, operating within cryptocurrency derivatives markets, represent a specialized class of traders exploiting fleeting price discrepancies across exchanges or instrument types.
Negative Funding Rate
Condition ⎊ Negative Funding Rate occurs in perpetual swap contracts when the annualized rate paid by short position holders to long position holders becomes negative, signaling that the market is predominantly net short.
Arbitrage
Exploitation ⎊ Arbitrage, within cryptocurrency, options, and derivatives, represents the simultaneous purchase and sale of an asset in different markets to capitalize on transient price discrepancies, effectively a risk-free profit opportunity.
Funding Rate
Cost ⎊ The Funding Rate is the periodic payment exchanged between long and short positions in perpetual futures contracts, designed to anchor the contract price to the underlying spot index price.