What is Funding Rate?
Funding rate is a periodic payment between traders holding long and short positions in perpetual swap contracts. It serves as a mechanism to keep the perpetual contract price close to the underlying spot price by incentivizing traders to take opposing positions when price divergence occurs.
Mechanics
Calculation
- Based on premium index
- Interest rate component
- Premium/discount to spot
- 8-hour intervals typical
Rate Direction
- Positive: Longs pay shorts
- Negative: Shorts pay longs
- Zero: Market at equilibrium
Trading Impact
Strategy Considerations
- Cost of holding positions
- Arbitrage opportunities
- Position timing
- Market sentiment indicator
Risk Management
- Funding costs calculation
- Position sizing adjustment
- Hold time planning
- Cost-benefit analysis
Related Terms
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