Perpetual futures contracts are financial derivatives designed for traders to speculate on the price movements of assets without owning the underlying asset. They seek to replicate the performance of an underlying spot asset and do not have an expiration date, allowing you to continue to hold your positions until they’re closed or liquidated. Trading perpetual futures makes use of margin to enable trading with less upfront funds (i.e. your margin requirements) than traditional spot market trading.
To buy, sell, and carry perpetual futures contracts, you must reside in an eligible, non-US region.
Perpetual futures contracts vs. futures contracts
Perpetual futures contracts
A financial agreement between two parties to buy or sell an asset at an unspecified point in the future
A financial agreement between two parties to buy or sell an asset at a specific price and time in the future
Designed to trade close to the underlying asset price
Priced based on the forward looking market price of an underlying asset
Does not expire or settle
Has a specific expiration date
Can be held indefinitely
Can be settled physically or financially
Perpetual futures contract price and funding rate
A funding rate mechanism is designed to minimize discrepancies between the perpetual futures market and the index price of the underlying spot asset.
The mechanism is applied in 1 hour intervals to open positions.
How the funding rate works
It governs payments between holders of long and short positions based on the difference in the price of the contract and the underlying index price
When the funding rate is negative, users who have short positions pay a fee to users who have long positions
When the funding rate is positive, users who have long positions pay a funding fee to users who have short positions
It represents the difference between the mark price of the perpetual futures market and the index price, which is equivalent to the spot market of the underlying asset
It ensures that the funding mechanism aligns the futures market price with the index price
Funding rate formula
TWAP (Premium, 1 hour, 1 second) * ɑ + (Previous Funding Rate) * (1-ɑ)
Premium = (Mark Price - Index Price) / Index Price / 24
ɑ = smooth / (n + 1);
smooth = 6;
n = number of previous periods used = 7 (funding interval)
Derived market price vs. index price
Derived market price represents the derived market price for each venue calculated as the median of the last trade price – best bid and best offer prices. An average of the derived market price is calculated for each venue of the underlying asset to determine the index price.