This article mainly expounds the definition of capital cost, capital rate, composition and calculation of capital rate and other related issues.
Foreword
As we all know, before the expiration of a futures contract, its price may deviate from the spot price; the difference between this price is called “basis”.
As the futures contract approaches its expiration date, the basis will gradually approach zero.
Since the perpetual contract has no settlement and expiration date, how can the basis be narrowed so that the latest market price is always anchored to the spot price? This is due to the funding fee mechanism.
Definition of Funding Cost
Funding fee is the main mechanism for BKEX to ensure that the latest market price is always anchored to the global spot price, which is somewhat similar to the overnight interest for holding positions 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 is, 00:00-08:00 is the first period, and the settlement time is 08:00; 08:00-16:00 is the first period, the settlement time is 16:00; 16:00-00:00 the next day is the first period, The settlement time is 00:00.
The above time is based on UTC+8 time.
If the funding rate is positive, the long position will pay the funding fee to the short position. Conversely, if the funding rate is negative, the short position will pay the funding fee to the long position.
Traders pay or receive funding fees only if they hold positions at these time cutoffs.
If a trader closes a position before the specified funding timestamp, no funding will be paid/received.
What is the funding rate?
Funding Rate = 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 currency of the BTC/USDT perpetual contract is BTC, and the pricing currency is USDT. In other words, the interest rate is the interest rate function between the two currencies: interest rate (I) = (pricing interest rate index – base interest rate index) / funding rate time interval.
Among them:
base interest rate index = lending rate of base currency
Pricing interest rate index = lending rate of pricing currency
Fund rate time interval = 8
Premium index = (Max (0, depth-weighted purchase price – mark price) – Max (0, Mark price – Depth-weighted selling price)) / spot price + reasonable basis rate of mark price
Calculation of Funding Rate
Based on the interest rate and premium/discount part of the funding rate interval of each contract. BKEX sets +/- 0.025% interval as the buffer zone.
Funding rate = premium index + clamp (interest rate – premium index, 0.025%, -0.025%)
Therefore, when (interest rate – premium index) is between +/- 0.025%, funding rate = premium index + (interest rate – premium index) = interest rate.
That is, the funding rate will be equal to the interest rate.
The calculated funding rate will be used to calculate the trader’s position value, and then calculate the funding fee that needs to be paid or charged at the corresponding time stamp.
In order to ensure that traders can use the highest leverage, BKEX has set limits on the funding rate of each perpetual contract: the upper and lower limits of the funding rate; the upper limit of each funding rate fluctuation.
Funding rate limit: The change of the funding rate in the funding interval shall not exceed the upper and lower limits set by each contract.
BKEX has set upper and lower limits on the funding rate to achieve the following goals:
- To ensure that investors can use the highest leverage;
- To avoid large liquidation while charging funding fees.
Please check BKEX official website or contact the customer support with regard to the latest information and more accurate details.
BKEX official website is here.
Please click "Introduction of BKEX", if you want to know the details and the company information of BKEX.
Comment by Hans
April 24, 2024
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