How much money is deducted from a perpetual contract every day

The funding rate for perpetual contracts, calculated as the annualized difference between the perp price and spot price, incentivizes traders to balance long and short positions, ensuring the perp price remains aligned with the spot price.

Nov 03, 2024 at 09:03 pm

Understanding Perpetual Contract Funding Rates

Perpetual contracts, commonly known as "perps," are financial instruments that allow traders to speculate on the future price of an underlying asset without an expiration date. As a result, perpetual contract positions can be held indefinitely.

To facilitate the seamless continuation of perp contracts, exchanges employ a funding rate mechanism, which is a small fee paid (or received) by traders based on the difference between the perp price and the spot price of the underlying asset. This fee ensures that the perp price remains closely aligned with the spot price.

How Funding Rates Work

1. Calculating the Funding Rate:

   The funding rate is calculated as the annualized difference between the perp price (P) and the spot price (S), multiplied by the contract notional value (K) and a factor of 365 days.

   Funding Rate = ((P - S) / S) K 365

2. Adjusting Positions:

   Traders holding long perpetual contract positions (betting on a price increase) will pay the funding rate to traders holding short positions (betting on a price decrease). This process incentivizes traders to maintain an equilibrium between long and short positions and aligns the perp price with the spot price.

3. Settlement:

   The funding rate is typically settled every eight hours (on OKX) or every six hours (on other exchanges). At these settlement intervals, traders holding long positions will transfer funds to traders holding short positions.

Impact of Funding Rates

• Convergence with Spot Price: Funding rates help maintain the perp price close to the spot price, preventing significant deviations.
• Traders' Behavior: High funding rates can influence traders' decisions by making it more expensive to hold long or short positions, thus encouraging market neutrality.
• Profitability: Traders can potentially profit from funding rate adjustments by strategically adjusting their positions based on the funding rate trajectory.

Example:

Let's say the perpetual contract price for ETH/USD is $1,200 and the spot price is $1,190. The notional value of each contract is $1,000.

The funding rate would be calculated as:

Funding Rate = ((1,200 - 1,190) / 1,190) 1,000 365 = 0.0033 USD

Therefore, traders holding long positions would pay 0.0033 USD to traders holding short positions for every $1,000 worth of ETH/USD perp contract every eight hours on OKX.