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.