What does perpetual contract delivery mean

Perpetual contracts offer a convenient trading mechanism without physical delivery, using a funding rate system to ensure price alignment with the underlying asset.

Oct 23, 2024 at 11:29 pm

What Does Perpetual Contract Delivery Mean?

1. Understanding Perpetual Contracts

Perpetual contracts are derivatives that track the underlying asset's price, such as cryptocurrencies, stocks, or commodities, without an expiration date. Unlike traditional futures contracts, which have a set settlement date, perpetual contracts allow traders to maintain open positions indefinitely.

2. Delivery Mechanism in Perpetual Contracts

Unlike traditional futures contracts that physically settle with the underlying asset, perpetual contracts do not involve physical delivery. Instead, they use a funding rate mechanism to ensure that the contract price remains aligned with the underlying asset's price. The funding rate is paid from one party (traders with long positions) to the other (traders with short positions) and vice versa, based on the market conditions.

3. Delivery Settlement in Funding

Instead of delivering the underlying asset, the settlement in perpetual contracts occurs through the funding rate payment. If the contract price is higher than the underlying asset's price, traders with short positions will pay a funding rate to traders with long positions. Conversely, if the contract price is lower, traders with long positions will pay the funding rate to traders with short positions.

4. Funding Schedule and Rate Calculation

Funding rates are usually paid on an hourly or eight-hour basis. The rate is calculated based on the difference between the contract price and the official reference rate, which is typically derived from the underlying asset's spot market.

5. Implications for Traders

The funding rate mechanism ensures that perpetual contracts accurately reflect the underlying asset's price and prevents market manipulation. For traders, it is crucial to consider funding rates when managing open positions. Traders speculating on a rising market may benefit from positive funding rates, while traders expecting a downtrend may favor negative funding rates.

Conclusion

Perpetual contract delivery differs from traditional futures contracts in that it does not involve physical delivery of the underlying asset. Instead, a funding rate mechanism adjusts the contract price to align with the underlying asset's price. This feature enables traders to maintain open positions without expiration dates and offers opportunities for traders to speculate on market movements without the obligation to deliver or receive the actual asset.