Perpetual Contracts Guide
A Perpetual Contract is a derivative product that is similar to a traditional Futures Contract, but has a few differing specifications. First of all, perpetual contracts have not expiration date or settlement date. Perpetual swap contract is akin to a margin-based spot market. Therefore, its price is close to the underlying reference Index Price, which is different from futures contract. Futures contract may trade at a significantly different price due to basis. Secondly, the primary mechanism to tether to spot price is Funding.
Currently Bit-Z provides several digital currency contract transaction including BTC, ETH, EOS, etc. Since contract does not have an expiration date, you don't have to worry about system settlement in the future. It's like owning a bidirectional position in spot market which supports margin trading.
Mechanics of Perpetual Contract Market
When trading perpetual contracts, traders need to know several mechanics of the market. The key components traders need to be aware of are:
1. Fair value Perpetual Swap Contracts are marked according to the Fair Price Marking method. The Mark Price determines unrealized gains and losses and liquidation prices.
2. Initial and Maintenance Margin: the key margin levels determine how much leverage one can trade with and at what price liquidation occurs.
3. Funding: Periodic payments exchanged between the buyer and seller every 8 hours. If the rate is positive, longs will pay and shorts will receive the rate, and vice versa if the rate is negative.-Please note that you will only pay or receive funding when you hold positions at funding timestamp.
4. Funding Timestamps: 00:00 (UTC+8), 08:00 (UTC+8) and 16:00 (UTC+8). Traders can find the current funding rate for contracts on the top right corner of the Trade tab. Similarly you can view this rate in your individual “Contract Specifications”. Historical rates are in the Funding History.
Funding generates every 8 hours at 00:00 (UTC+8), 08:00 (UTC+8) and 16:00 (UTC+8). You will only pay or receive funding if you hold positions at one of these timestamps. If you close your positions prior to the funding timestamp then you will not pay or receive funding.
The funding you pay or receive is calculated as:
Funding = Position Value * Funding Rate
Your position value is irrespective of leverage. For example, if you hold 100 BTCUSD contracts, funding is charged/received on the notional value of those contracts, and is not based on how much margin you have assigned to the position.
When the Funding Rate is positive, longs pay shorts. When it is negative, shorts pay longs.
Funding Rate Calculations
The Funding Rate is comprised of two main parts: the Interest Rate and the Premium / Discount. This rate aims to keep the transaction price of the perpetual contract in line with spot price. In this way, the swap contract works like margin-trading spot markets, where buyers and sellers exchange interest payments periodically.
Every contract traded on Bit-Z consists of two types of currencies: base currency and quote currency. For example, BTCUSD or BTC_USD, the base currency is BTC while the quote currency is USD.
Interest Rate is a function of interest rates between these 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 (Since funding occurs every 8 hours)
Note: Under each Contract Specification page, the source borrow market is stated for each Interest Index.
The perpetual contract may trade at a significant premium or discount to the Mark Price. In this situation, a Premium Index will be used to raise or lower the next Funding Rate to match with the contract currently trading.
Each contract's Premium Index is available on the specific instrument's Contract Specifications page and is calculated as follows:
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
Final Funding Rate Calculation
Bit-Z 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 next calculated by 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%)
Funding Rate Caps
Bit-Z imposes caps on the Funding Rate to ensure the maximum leverage can still be utilized. To do this, two caps are imposed:
1. 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%, the maximum Funding Rate will be 75% * (1% - 0.5%)= 0.375%.
2. The Funding Rate may not change by more than 75% of the Maintenance Margin between Funding Intervals.
Bit-Z does not charge any fees on funding; it is exchanged directly peer-to-peer.