How Does the Funding Rate Create Arbitrage Opportunities?
The funding rate creates arbitrage opportunities by offering a predictable, risk-free profit (in theory) when a significant gap exists between the perpetual contract price and the spot price. For example, if the perpetual is trading far above the spot price, leading to a high positive funding rate, an arbitrageur can short the perpetual contract while simultaneously buying the equivalent amount of the asset on the spot market.
They lose on the price convergence but earn the high funding payment. This act of arbitrage helps to close the price gap.
Glossar
Price Convergence
Arbitrage ⎊ Price convergence, within cryptocurrency derivatives, represents the reduction of price discrepancies for identical or nearly identical assets across different exchanges or derivative markets.
Arbitrage Opportunities
Exploitation ⎊ Arbitrage Opportunities in crypto derivatives arise from temporary price dislocations between related instruments across different venues or between the derivative and its underlying spot asset, demanding rapid, automated execution to capture the spread.
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.
Funding Rate Arbitrage
Mechanism ⎊ Funding Rate Arbitrage, within cryptocurrency perpetual contracts, exploits the differential between the funding rate and the spot market price to generate risk-free profit.