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What is the holding price of perpetual contracts?
The holding price for perpetual contracts is calculated based on the index price, funding rate, and time held, and can increase or decrease over time due to the funding rate mechanism.
Oct 22, 2024 at 01:53 am
What is the Holding Price of Perpetual Contracts?
1. Overview of Perpetual Contracts
Perpetual contracts are a type of financial derivative that tracks the price of an underlying asset, such as Bitcoin or Ethereum. Unlike futures contracts, perpetual contracts do not have a fixed expiration date and can be held indefinitely.
2. Funding Rate Mechanism
To keep the price of perpetual contracts close to the spot market price of the underlying asset, a funding rate mechanism is employed. This rate is paid by traders with long positions to traders with short positions and vice versa.
3. Calculation of Holding Price
The holding price for a perpetual contract is calculated based on the following formula:
Holding Price = Index Price + (Funding Rate * Time Held)- Index Price: The spot market price of the underlying asset at the time of the calculation.
- Funding Rate: The current funding rate.
- Time Held: The duration that the contract has been held open in hours.
4. Example
Suppose the spot price of Bitcoin is $17,000 and the funding rate is -0.01% per hour. If you hold a long position on a perpetual contract for 24 hours, the holding price will be calculated as follows:
Holding Price = $17,000 + (-0.01% * 24) = $16,996This means that the value of your contract has decreased by $4 during the 24-hour period due to the negative funding rate.
5. Implications
The holding price of perpetual contracts is crucial for traders because it represents the actual cost of holding a position over time. Positive funding rates can increase the holding price, while negative funding rates can decrease it. This can have a significant impact on the profitability of trading perpetual contracts.
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