How Does the Funding Rate Introduce Uncertainty for Hedgers?
The funding rate introduces uncertainty for hedgers because the periodic payments (or receipts) are variable and unpredictable. While the hedger's profit/loss on the underlying asset is offset by the futures contract, the funding rate represents an unknown cost or benefit that can erode the effectiveness of the hedge over a long period.
This variability makes long-term cost planning difficult.
Glossar
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.
Hedgers
Mitigation ⎊ In cryptocurrency derivatives, a hedger represents an entity seeking to offset potential losses arising from adverse price movements in underlying digital assets.