Perpetual Contract Overview
BaseFEX currently offers trading for Perpetual Contracts.
- Opposed to futures, Perpetual Contracts do not have an expiry date so that there is no settlement.
- Perpetual Contracts have a Funding Rate that is updated every 8 hours. While holding the positions of Perpetual Contracts, you will pay or receive funding over this time automatically.
Mechanism of the Perpetual Contract Market
When you are trading Perpetual Contracts, you need to be aware of several features of the market. See below:
- Position Marking: Perpetual Contracts are marked according to the Fair Price Marking method. The mark price determines Unrealized PNL and liquidation prices.
- Initial and Maintenance Margin: These margin levels determine how much leverage you can trade with and at which point the liquidation might occur.
- Funding: The funding payments are exchanged between the long position holders and short position holders every 8 hours. If the rate is positive, the long position holders will pay the short position holders rate, and vice versa if the rate is negative. You will only pay or receive the funding if you hold a position at that Funding Timestamp.
- Funding Timestamp: 02:00 UTC+00, 10:00 UTC+00 and 18:00 UTC+00.
Funding occurs every 8 hours at 02:00 UTC+00, 10:00 UTC+00 and 18:00 UTC+00 everyday. You only pay or receive the funding when you hold a position at one of these times. If you close your position before the funding exchange, you will not pay or receive funding.
The funding you pay or receive is calculated as below:
Funding = Position Value * Funding Rate
Your position value will not be affected by the leverage. For example, if you hold 100 BTCUSD contracts, the funding is charged or received on the notional value of those contracts, and is not based on how much margin you have assigned to that position.
When the Funding Rate is positive, longs pay shorts, and vice versa when the rate is negative.
Funding Rate Calculations
The Funding Rate is composed of two parts: the Interest Rate and the Premium/Discount.
The Funding Rate aims to keep the traded price of your Perpetual Contract in line with the underlying reference price. Therefore, the contract mimics how margin-trading markets work as the longs and shorts of the contract exchange interest payments periodically.
Every contract traded at BaseFEX consists of two parts: a Base currency and a Quote currency. For the case of BTCUSD Perpetual Contract, the Base currency is Bitcoin and the Quote currency is USD. The Interest Rate is a function of interest rates between the two currencies.
Interest Rate (I) = (Interest Quote Index - Interest Base Index) / Funding Interval where Interest Base Index = The Interest Rate for borrowing the Base currency Interest Quote Index = The Interest Rate for borrowing the Quote currency Funding Interval = 3 (The funding occurs every 8 hours)
Premium / Discount
The perpetual contract might be traded at a significant premium or discount to the Mark Price. Under those circumstances, a Premium Index will be used to raise or lower the next Funding Rate to levels consistent with which the contract is being traded. The Premium Index of each contract is available on the Perpetual Contract page and is calculated as below:
Premium Index (P) = (Max(0, Impact Bid Price - Mark Price) - Max(0, Mark Price - Impact Ask Price)) / Spot Price + Fair Basis used in Mark Price
Please check Fair Price Marking for more information on the Impact Bid Price and the Impact Ask Price.
Final Funding Rate Calculation
BaseFEX calculates the Premium Index
(P) and Interest Rate
(I) every minute and then performs an 8-hour Time-Weighted-Average-Price (TWAP) over the series of minute rates.
The funding rate is calculated with the 8-Hour Interest Rate Component and the 8-Hour Premium / Discount Component. A
+/- 0.05% dampener is added.
Funding Rate (F) = Premium Index (P) + clamp(Interest Rate (I) - Premium Index (P), 0.05%, -0.05%)
The 'clamp' function clamps a value between an upper and lower bound, where the preferred value is the first parameter, the upper bound is the second parameter and the lower bound is the third parameter. Simply put, 'clamp' selects the middle value among the three. Therefore, if
(I - P) is within
+/- 0.05%, then we take
(I - P) and
F = P + (I - P). This means the Funding Rate is equal to the Interest Rate.
This calculated Funding Rate is then applied to your BTC Position Value to determine the Funding Amount to be paid or received at the Funding Timestamp.
Funding Rate Caps
BaseFEX sets caps on the Funding Rate to ensure that the maximum leverage can still be filled. There are two caps:
- The absolute Funding Rate is capped at 75% of the
Initial Margin - Maintenance Margin. If the Initial Margin is 1% and the Maintenance Margin is 0.5%, then the maximum Funding Rate will be
75% * (1% - 0.5%) = 0.375%.
- The Funding Rate shall not be changed by more than 75% of the Maintenance Margin between Funding intervals.
BaseFEX does not charge any fees on funding. The funding is exchanged directly between the long and short position holders.
Long BTCUSD Perpetual Contract Example
The following examples do not take Premium into consideration.
BTCUSD Perpetual Contract Details
Contract Value = 1 USD Margin Currency = Bitcoin Underlying Index = BTC BaseFEX Indices Interest Quote Index = USD Lending Rate in the BaseFEX Indices (.USDBON) Interest Base Index = BTC Lending Rate in the BaseFEX Indices (.BTCBON) Funding Timestamp = 02:00 UTC, 10:00 UTC, and 18:00 UTC
Day 1, 08:00 UTC+00
You go Long on 150,000 BTCUSD Perpetual Contracts at a price of 7500 USD.
BTC Position Value = 150,000 Contracts * 1 USD * 1/7500 = 20 BTC
Day 1, 10:00 UTC+00
You hold the position over the Funding Timestamp at 10:00 UTC+00 and exchange the Funding Amount. The amount you pay is determined as below:
The BTCUSD spot price is currently 7500 USD.
Interest Quote Index = 1.00% per day Interest Base Index = 0.25% per day Funding Rate = (1.00% - 0.25%) / 3 = 0.25%
Funding Amount = Position Value * Funding Rate = 20 BTC * 0.25% = 0.05 BTC
The Funding Amount is positive, so you need to pay since you are Long, and your counterpart who is Short receives this 0.05 BTC.
Day 1, 16:00 UTC+00
The BTCUSD contract rises in price to 8000 USD. You close your position by selling the 150,000 BTCUSD contracts. Since you do this before the next Funding Timestamp at 18:00 UTC+00, you do not need to pay the Funding Amount at that time.
You made 1.25 BTC profit from the increase in the value of BTCUSD:
PNL = 150,000 * 1 USD * (1/7500 - 1/8000) = 1.25 BTC
You exchanged 0.05 BTC in funding, and your total profit is 1.2 BTC
(1.25 BTC - 0.05 BTC).
Funding Rate Examples
Interest Rate (I) = (Interest Quote Index - Interest Base Index) / Funding Interval Premium Index (P) = (Max(0, Impact Bid Price - Mark Price) - Max(0, Mark Price - Impact Ask Price)) / Spot Price Funding Rate (F) = Premium Index (P) + clamp(Interest Rate (I) - Premium Index (P), 0.05%, -0.05%)
See below the example of how the Funding Rate (F) varies with different the Interest Rate (I) and Premium Index figures.
|Interest Rate (I)||Premium Index (P)||Funding Rate (F)|