🔁 Funding
Funding rates are recurring cash flows that occur between holders of long and short positions. These cash flows are based on the difference between the perpetual Futures and index prices. In a bullish market, the funding rate is typically positive, resulting in traders with long positions paying traders on the short side. Conversely, in a bearish market, the funding rate tends to be negative, with traders holding short positions paying traders on the long side.
Perpetual Futures contracts, unlike traditional Futures, do not have an expiration date. Traders can hold these contracts indefinitely unless they are liquidated. To ensure that the prices of perpetual contracts align with the underlying markets, cryptocurrency exchanges have implemented a mechanism called the Funding Rate. This mechanism primarily aids in converging the prices of perpetual contracts with the prices of the underlying assets. With sufficient liquidity, trading perpetual contracts is very similar to trading in the spot market.
The Funding Amount is determined using the formula: Funding Amount = Nominal Value of Positions * Funding Rate. The Nominal Value of Positions is calculated as Mark Price multiplied by the Size of a Contract.
Traders are only responsible for funding payments if they have open positions at the designated funding times. If a trader does not have any open positions, they are not liable for any funding. Additionally, if a trader closes their position before the funding time, they will not incur any funding fees.
There is a slight deviation of 1 minute in the actual funding fee transaction time. For example, if a trader opens a position at 08:00:59 UTC, the funding fee may still apply to the trader, either as a payment or a receipt of the funding fee.
The Funding Rate formula:
Funding Rate (F) = Average Premium Index (P) + clamp (interest rate - Premium Index (P), 0.05%, -0.05%)
*Premium Index (P) here refers to the current average
Note:
The function clamp (x, min, max) means that if (x < min), then x = min; if (x > max), then x = max; if max ≥ x ≥ min, then return x. In other words, as long as the Premium Index is between -0.04% to 0.06%, the Funding Rate will equal 0.01% (the Interest Rate).
If (Interest Rate (I) - Premium Index (P)) is within +/-0.05%, then F = P + (I - P) = I. In other words, the Funding Rate will equal the Interest Rate, which is 0.01%
The Impact Margin Notional (IMN) is used to locate the average Impact Bid or Ask price in the order book. IMN for USDⓈ-Margined contracts is the notional available to trade with 200 USDT worth of margin (price quote in USDT). Impact Margin Notional (IMN) = 200 USDT / Initial margin rate at the maximum leverage level.
For Premium Index Series in this funding period, we substitute it to the Average Premium Index formula: Average Premium Index (P) = (1*Premium_Index_1 + 2*Premium_Index_2 + 3*Premium_Index_3 +···+ n*Premium_Index_n) / (1+2+3+···+n) *Premium Index 1: the first premium index data point n = 60/5 * 60 * 8 = 5,760 (Assume the funding interval is 8 hours)
Premium Index every 5 seconds (12 premium index data points in a minute). The number of data points used to calculate the Funding Rate n = 60/5 * 60 * hours of the funding interval For example, the Funding Rate is calculated by taking the time-weighted average across all 5,760 premium index data points for the 8-hour funding interval.
Last updated