How to calculate Kraken contract returns

To calculate the returns on a Kraken futures contract, you must factor in the contract price, underlying asset price, contract size, margin rate, and funding rate.

Nov 11, 2024 at 08:05 pm

How to Calculate Kraken Contract Returns

Introduction

Kraken is a popular cryptocurrency exchange that offers a variety of trading options, including futures contracts. Futures contracts are agreements to buy or sell an asset at a specified price on a future date. They can be used for hedging, speculation, and arbitrage.

Calculating the returns on a Kraken contract is a relatively straightforward process. However, there are a few factors that you need to take into account. These include:

• The contract price
• The underlying asset price
• The contract size
• The margin rate
• The funding rate

Steps to Calculate Kraken Contract Returns

1. Determine the contract price. The contract price is the price at which you buy or sell the contract. It is expressed in terms of the underlying asset. For example, if you are buying a Bitcoin futures contract, the contract price will be quoted in Bitcoin.
2. Determine the underlying asset price. The underlying asset price is the price of the asset that is being traded. For example, if you are buying a Bitcoin futures contract, the underlying asset price will be the price of Bitcoin.
3. Determine the contract size. The contract size is the number of units of the underlying asset that are being traded. For example, if you are buying a Bitcoin futures contract, the contract size will be 1 BTC.
4. Determine the margin rate. The margin rate is the percentage of the contract value that you are required to deposit as collateral. For example, if you are buying a Bitcoin futures contract with a margin rate of 10%, you will need to deposit 0.1 BTC as collateral.
5. Determine the funding rate. The funding rate is the fee that is charged or paid to the holders of a contract. It is used to ensure that the contract price remains in line with the underlying asset price. The funding rate is typically expressed in terms of an annual percentage rate (APR).

Example

Let's say that you buy a Bitcoin futures contract with the following parameters:

• Contract price: $10,000
• Underlying asset price: $10,000
• Contract size: 1 BTC
• Margin rate: 10%

Steps to calculate the returns:

1. Calculate the initial margin. The initial margin is the amount of collateral that you are required to deposit. In this case, the initial margin is 0.1 BTC.
2. Calculate the maintenance margin. The maintenance margin is the minimum amount of collateral that you must maintain in your account to keep the contract open. The maintenance margin is typically lower than the initial margin. In this case, the maintenance margin is 0.05 BTC.
3. Calculate the profit or loss. The profit or loss on the contract is determined by the difference between the contract price and the underlying asset price. If the contract price is higher than the underlying asset price, you will make a profit. If the contract price is lower than the underlying asset price, you will make a loss.
4. Calculate the return on investment (ROI). The ROI is the percentage return on your investment. It is calculated by dividing the profit or loss by the initial margin.

In this example, let's say that the underlying asset price increases to $11,000. The profit on the contract would be $1,000. The ROI would be 10% (1,000 / 10,000).

Factors to Consider

There are a few factors that can affect the returns on a Kraken contract. These include:

• The volatility of the underlying asset. The more volatile the underlying asset, the more volatile the contract returns will be.
• The liquidity of the contract. The more liquid the contract, the easier it will be to buy and sell the contract. This can affect the returns on the contract, as it can impact the bid-ask spread.
• The margin rate. The margin rate can affect the returns on the contract, as it determines the amount of collateral that you are required to deposit.
• The funding rate. The funding rate can affect the returns on the contract, as it can impact the cost of holding the contract open.

Conclusion

Calculating the returns on a Kraken contract is a relatively straightforward process. However, it is important to take into account the factors that can affect the returns, such as the volatility of the underlying asset, the liquidity of the contract, the margin rate, and the funding rate.