This paper mainly discusses the definition of funds cost, capital rate, the composition and calculation of capital rate and other related issues.
As we know, before a futures contract expires, it is possible for its price to drift away from the spot price; the difference between this is called the "basis". As a futures contract approaches expiration, the basis will gradually approach zero.
Since perpetual futures have no settlement and expiration date, how to narrow the basis and keep the latest market price anchored to the spot price? This is because of the funds cost mechanism.
Definition of Funding Cost
Funding fees are the main mechanism for BKEX to ensure that the latest market price is always anchored to global spot price, which is somewhat similar to the overnight interest on positions held in spot margin trading.
Ways to Pay or Receive Funding Fees
Funding rate collection time: every 8 hours is a period, and settlement is made at the end of each period. That means 00:00-08:00 is a period, and the settlement time is 08:00; 08:00-16:00 is a period, and the settlement time is 16:00; 16:00-00:00 (the next day) is a period, Settlement time is 00:00. The above times are all UTC+8 time. If the funding rate is positive, long positions will pay funding to short positions. Conversely, if the funding rate is negative, the short position will pay the funding fee to the long position. Traders only pay or receive funding fees for holding positions at these time-points. If the trader closes the position before the specified funding fee timestamp, no funding fee will be paid/acquired.
What is the funding rate?
Funding Fee = Position Value * Funding Rate.
Before understanding how the funding fee makes the latest market price always anchor the spot price, we need to understand the key factors of the funding fee and the composition of the funding rate. The funding rate is mainly divided into two parts, namely the interest rate and the premium index.
1. Interest rate: composed of base token and denomination token.
For example: the base token of BTC/USDT perpetual contract is BTC, and the denomination token is USDT. In other words, the interest rate is a function of the interest rate between the two tokens: Interest Rate (I) = (Invoicing Interest Rate Index - Base Interest Rate Index) / Funding Rate Time Interval.
Base rate index = Lending rate of base token
Denominated interest rate index = Borrowing rate of denominated token
Funding Rate Interval = 8
2. Premium Index = ( Max ( 0 , Depth Weighted Bid Price - Mark Price) - Max ( 0 , Mark Price - Depth Weighted Ask Price)) / Spot Price + Mark Price Reasonable Basis Rate
Calculation of Funding Rate
The funding rate is calculated based on the interest rate and premium/discount portion of the funding rate interval for each contract. BKEX sets a buffer zone of +/- 0.025%.
Funding rate = Premium index + Clamp (interest rate - premium index, 0.025%, -0.025%)
So, when (Interest Rate - Premium Index) is between +/- 0.025%, Funding Rate = Premium Index + (Interest Rate - Premium Index) = Interest Rate.
That means that the funding rate will be equal to the interest rate. The calculated funding rate will be used to calculate the value of the trader's position, and then calculate the funding fee to be paid or cost at the corresponding timestamp.
In order to ensure that traders can use the highest leverage, BKEX imposes restrictions on the funding rate of each perpetual contract: the upper and lower limit of the funding rate; the upper limit of the fluctuation of the funding rate each time.
Funding rate limit: The change of the funding rate within the funding interval shall not exceed the upper and lower limits set by each contract.
BKEX sets upper and lower limits on the funding rate to achieve the following goals:
a) Ensure that investors can use the highest leverage;
b) Avoid a large amount of liquidation while charging funding fees.
*Funding fees are charged by the long and short parties, and the BKEX platform does not charge funding fees.
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