How to calculate the funding rate of MEXC contract? What is the impact of positive and negative rates on positions?

Calculating MEXC's funding rate involves using the Premium Index and Interest Rate; positive rates mean long holders pay shorts, while negative rates mean shorts pay longs.

May 03, 2025 at 07:56 pm

Understanding how to calculate the funding rate of MEXC contracts and the impact of positive and negative rates on positions is crucial for traders navigating the cryptocurrency futures market. The funding rate is a mechanism used in perpetual futures contracts to ensure that the market price of the futures contract remains closely aligned with the spot price of the underlying asset. Let's delve into the details of calculating the funding rate and explore the effects of positive and negative rates on trading positions.

What is the Funding Rate?

The funding rate is a periodic payment made between traders based on the difference between the perpetual contract's market price and the spot price of the underlying cryptocurrency. If the funding rate is positive, long position holders pay short position holders; if it's negative, short position holders pay long position holders. The rate is calculated and settled at regular intervals, typically every 8 hours on MEXC.

How to Calculate the Funding Rate on MEXC

Calculating the funding rate on MEXC involves several steps. Here's a detailed guide on how to do it:

• Navigate to the Contract Page: Start by logging into your MEXC account and navigating to the futures trading section. Select the specific contract you're interested in, such as BTC/USDT.

• Identify the Funding Rate Formula: MEXC uses the following formula to calculate the funding rate:
  [
  \text{Funding Rate} = \text{Premium Index} + \text{Clamp}(\text{Interest Rate} - \text{Premium Index}, 0.05\%, -0.05\%)
  ]
  Here, the Premium Index is the difference between the perpetual contract's price and the spot price, while the Interest Rate is typically a small fixed rate.

• Obtain the Necessary Data: You'll need the current Premium Index and Interest Rate. These values are usually provided by MEXC on their trading platform or through their API.

• Calculate the Funding Rate: Plug the values into the formula. For example, if the Premium Index is 0.01% and the Interest Rate is 0.03%, the calculation would be:
  [
  \text{Funding Rate} = 0.01\% + \text{Clamp}(0.03\% - 0.01\%, 0.05\%, -0.05\%) = 0.01\% + 0.02\% = 0.03\%
  ]
  The Clamp function ensures that the difference between the Interest Rate and Premium Index does not exceed 0.05% or fall below -0.05%.

• Determine the Funding Payment: The funding payment is then calculated as:
  [
  \text{Funding Payment} = \text{Position Value} \times \text{Funding Rate}
  ]
  For instance, if you hold a position valued at 10,000 USDT, the funding payment would be:
  [
  \text{Funding Payment} = 10,000 \times 0.03\% = 3 \text{ USDT}
  ]

Impact of Positive Funding Rates on Positions

When the funding rate is positive, long position holders are required to pay short position holders. This scenario typically occurs when the perpetual contract's price is trading at a premium to the spot price, indicating bullish sentiment in the market.

• Effect on Long Positions: For traders holding long positions, a positive funding rate means they need to pay funding fees. This can erode their potential profits, especially if they maintain their positions over multiple funding intervals. It's crucial for long position holders to factor these costs into their trading strategy.

• Effect on Short Positions: Conversely, traders with short positions receive funding payments. This can enhance their returns, providing an additional income stream. Short sellers may be more inclined to maintain their positions, benefiting from both potential price declines and the funding payments.

Impact of Negative Funding Rates on Positions

A negative funding rate occurs when the perpetual contract's price is trading at a discount to the spot price, signaling bearish sentiment. In this case, short position holders pay long position holders.

• Effect on Short Positions: Traders holding short positions are required to pay funding fees when the rate is negative. This can reduce their profits or increase their losses, making it important for them to consider the cost of holding their positions.

• Effect on Long Positions: For long position holders, a negative funding rate means they receive funding payments. This can boost their returns, providing an additional incentive to maintain their positions. Long traders may find it advantageous to hold their positions longer, benefiting from both potential price increases and the funding payments.

Practical Example of Funding Rate Calculation

Let's walk through a practical example to illustrate how to calculate the funding rate and its impact on positions. Suppose you are trading the BTC/USDT perpetual contract on MEXC, and the following data is available:

• Premium Index: 0.02%
• Interest Rate: 0.04%
• Position Value: 5,000 USDT

Using the funding rate formula:

[
\text{Funding Rate} = 0.02\% + \text{Clamp}(0.04\% - 0.02\%, 0.05\%, -0.05\%) = 0.02\% + 0.02\% = 0.04\%
]

The funding payment for your position would be:

[
\text{Funding Payment} = 5,000 \times 0.04\% = 2 \text{ USDT}
]

If you hold a long position, you would pay 2 USDT every 8 hours. If you hold a short position, you would receive 2 USDT every 8 hours.

Frequently Asked Questions

Q1: How often is the funding rate calculated and settled on MEXC?

The funding rate on MEXC is calculated and settled every 8 hours. This regular interval ensures that the perpetual contract's price remains closely aligned with the spot price.

Q2: Can the funding rate be zero?

Yes, the funding rate can be zero if the Premium Index and the Interest Rate offset each other exactly in the funding rate formula. In such cases, no funding payments are exchanged between long and short position holders.

Q3: How can I find the current Premium Index and Interest Rate on MEXC?

You can find the current Premium Index and Interest Rate on MEXC by navigating to the specific contract page on the MEXC platform. These values are typically displayed alongside other key market data.

Q4: Does the funding rate affect my trading strategy?

Yes, the funding rate can significantly impact your trading strategy. Long position holders need to consider the cost of funding fees, while short position holders can benefit from receiving funding payments. It's important to incorporate these costs and benefits into your overall trading plan.