How Is the Funding Rate Calculated on a Perpetual Futures Contract?
The funding rate is calculated using a formula that includes the Premium Index and an Interest Rate Component. The Premium Index measures the difference between the perpetual contract's price and the underlying Index Price.
The Interest Rate Component is a fixed or variable rate based on the borrowing cost of the underlying asset. The resulting rate is paid every few hours to keep the contract price in line with the spot price.
Glossar
Payment Interval
Settlement ⎊ Payment Interval defines the periodicity with which cash flows are exchanged between counterparties in derivative contracts, fundamentally impacting risk exposure and capital allocation strategies.
Contract Price
Definition ⎊ Contract price refers to the agreed-upon price at which a derivative contract, such as an option or future, is bought or sold.
Funding Rate Calculation
Formula ⎊ Periodic payments between long and short positions ensure that the perpetual swap price remains closely aligned with the underlying spot index.
Perpetual Futures
Contract ⎊ Perpetual futures represent a type of financial derivative contract, specifically within the cryptocurrency and options trading space, that replicates the payoff of a traditional futures contract without a fixed expiration date.
Interest Rate Component
Yield ⎊ Within cryptocurrency derivatives and options trading, yield represents the anticipated return derived from an asset or contract, critically influenced by prevailing interest rate dynamics.
Borrowing Cost
Expense ⎊ Borrowing Cost represents the annualized rate or fee incurred by a market participant to temporarily utilize an asset, typically for short-selling or leveraged trading in cryptocurrency and derivatives markets.