What Is a ‘Perpetual Swap’ and How Is Its Funding Rate Used in Hedging?
A perpetual swap is a derivative contract similar to a futures contract but without an expiry date. It is designed to track the underlying asset's spot price.
The funding rate is a periodic payment exchanged between long and short traders to keep the swap price anchored to the spot price. OTC desks use perpetual swaps for hedging, and the funding rate represents a cost or income that must be factored into the overall hedging P&L.
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.
Perpetual Swap
Mechanism ⎊ Perpetual swaps, within cryptocurrency markets, represent agreements to exchange cash flows based on the difference between a cryptocurrency’s current price and a user-defined price, perpetually, without an expiration date.
Long and Short Traders
Long ⎊ A long trader holds a market position that profits from an increase in the asset's price.