How to calculate Kraken contract rates

To calculate Kraken contract rates, traders must consider the basis price, funding rate, contract size, index price, mark price, premium/discount, and liquidation price.

Nov 21, 2024 at 09:22 am

How to Calculate Kraken Contract Rates

Kraken, a leading cryptocurrency exchange, offers a sophisticated suite of contract trading options for experienced traders. Understanding how to calculate contract rates on Kraken is essential for effective trading and risk management. This article provides a comprehensive guide to calculating Kraken contract rates, empowering traders with the knowledge to maximize their trading strategies.

Step 1: Understand Basis Price and Funding Rate

Basis Price:

• Represents the spot price of the underlying asset at the time of contract expiration.
• Determines the final settlement value of the contract.

Funding Rate:

• A periodic payment made between long and short positions to maintain price parity with the spot market.
• Positive for long positions (shorts pay longs) when contract price exceeds spot price, and vice versa for negative funding rates.

Step 2: Determine Contract Specifications

Contract Size:

• The number of underlying units represented by each contract.
• Varies depending on the specific contract type and underlying asset.

Trading Pair:

• The combination of the underlying asset and the quote currency.
• Example: BTC/USD is the trading pair for Bitcoin contracts quoted in US dollars.

Step 3: Calculate Index Price and Mark Price

Index Price:

• An aggregation of spot prices from multiple exchanges to provide a reliable market benchmark.
• Used as the reference point for calculating contract rates.

Mark Price:

• A time-weighted average of the recent trading prices, adjusted for funding rates.
• Represents the current fair value of the contract.

Step 4: Calculate Premium or Discount

Premium:

• When the contract price trades above the index price, indicating a bullish sentiment.

Discount:

• When the contract price trades below the index price, indicating a bearish sentiment.

Calculation:

(Contract Price - Index Price) / Index Price * 100

Step 5: Determine Contract Value

Long Position:

• Positive value if contract price exceeds basis price at expiration.
• Cost to buy contract plus funding payments.

Short Position:

• Negative value if contract price falls below basis price at expiration.
• Profit from selling contract plus funding payments received.

Step 6: Understand Liquidations

Liquidation:

• Forced closure of a position when it falls below a certain margin requirement.
• Ensures market stability and prevents excessive losses.

Liquidation Price:

• The price at which a position is liquidated based on the trader's available margin.

Step 7: Monitor and Adjust Positions

Constant Monitoring:

• Regularly monitor contract rates, index price, and funding rates.

Position Adjustments:

• Adjust positions as market conditions change to minimize losses and maximize profits.
• Reduce or close positions if funding rates become unfavorable.