What Is the ‘Interest Rate Component’ in the Funding Rate Formula?

The interest rate component is a fixed or variable rate included in the funding rate calculation to represent the implied borrowing costs of holding the underlying asset. It acts as a baseline interest rate, often tied to a standard financial rate, to account for the time value of money and the cost of capital.

This component ensures that the funding rate reflects not just the premium, but also a basic financial cost of carrying the position.