How Does Arbitrage Contribute to the Funding Rate Mechanism's Effectiveness? ▴ Learn

How Does Arbitrage Contribute to the Funding Rate Mechanism’s Effectiveness?

Arbitrageurs play a crucial role by exploiting the difference between the perpetual contract price and the spot price. If the contract price is too high (positive funding rate), an arbitrageur will simultaneously short the future and buy the spot asset.

This action drives the future price down and the spot price up, closing the gap. By capitalizing on these price discrepancies, arbitrageurs ensure the funding rate mechanism achieves its goal of price convergence.

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