How Do Perpetual Swaps Manage Basis Risk without an Expiration Date?
Perpetual swaps manage basis risk through the Funding Rate mechanism. The Funding Rate is a small, periodic payment exchanged between the long and short sides to ensure the perpetual contract's price (the Mark Price) remains closely tethered to the underlying Index Price.
If the perpetual trades above the index, longs pay shorts (positive funding), incentivizing short positions and pushing the price down, thus controlling the basis.
Glossar
Funding Rate Mechanism
Mechanism ⎊ Funding Rate Mechanisms within cryptocurrency derivatives represent periodic payments exchanged between traders holding opposing positions in perpetual contracts, designed to anchor the perpetual contract price to the underlying spot market.
Short Positions
Definition ⎊ Short Positions represent a market stance where a trader profits if the price of an asset or derivative declines, typically achieved by borrowing and selling or by selling a derivative like a put option.
Perpetual Swaps
Definition ⎊ Perpetual swaps are a type of derivative contract, highly popular in cryptocurrency markets, that allows traders to speculate on the future price of an asset without an expiration date.
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.