How Does the Funding Rate of a Perpetual Swap Relate to Inventory Risk for a Market Maker?

The funding rate is a periodic payment between long and short traders of a perpetual swap contract, designed to keep the swap price close to the spot price. If a market maker uses a perpetual swap to hedge their inventory, a highly positive or negative funding rate introduces a significant, ongoing cost or income stream.

This funding cost/income must be managed as part of the overall inventory risk and can make the hedge expensive.