What Components Determine the Calculation of the Funding Rate?
The funding rate is typically composed of two main components: the interest rate and the premium. The interest rate component is usually a fixed rate determined by the interest rate differential between the base and quote currencies.
The premium component accounts for the price difference between the perpetual contract and the underlying spot price. It fluctuates based on market demand, increasing when the perpetual trades at a premium and decreasing when it trades at a discount, directly reflecting the cost of maintaining a leveraged position.
Glossar
Interest Rate
Yield ⎊ Interest rate, within cryptocurrency derivatives, represents the cost of capital or the return on an underlying asset utilized in constructing a derivative position, impacting pricing models and arbitrage opportunities.
Interest Rate Differential
Arbitrage ⎊ Interest rate differentials, within cryptocurrency derivatives, represent the variance in borrowing or lending rates across different exchanges or protocols, creating opportunities for risk-free profit through simultaneous execution of offsetting transactions.
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.
Funding Rate
Mechanism ⎊ Funding Rate represents a periodic payment exchanged between traders holding opposing positions in perpetual futures contracts, establishing an equilibrium between contract prices and the underlying spot market.