How Does the Funding Rate of a Perpetual Swap Relate to the Cost of Carry for a Futures Hedge? ▴ Learn

How Does the Funding Rate of a Perpetual Swap Relate to the Cost of Carry for a Futures Hedge?

The funding rate in a perpetual swap is a periodic payment between long and short traders, designed to keep the swap price close to the spot price. A positive funding rate means long traders pay shorts, and a negative rate means shorts pay longs.

If a hedger uses a short perpetual swap, a positive funding rate acts as a negative cost of carry (a gain), while a negative funding rate increases the cost of carry (an expense).

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