How are the returns of currency-based perpetual contracts calculated?

The returns on currency-based perpetual contracts are influenced by factors such as price volatility, leverage applied, trading spreads, and the funding rate, which affects long and short positions held.

Dec 03, 2024 at 02:21 pm

How are the returns of currency-based perpetual contracts calculated?

Currency-based perpetual contracts are a type of derivative contract that allows traders to speculate on the price of a currency pair without having to take delivery of the underlying asset. They are similar to futures contracts, but unlike futures contracts, perpetual contracts do not have an expiration date. This means that traders can hold perpetual contracts for as long as they want, or until they decide to close their position.

The returns of currency-based perpetual contracts are calculated based on the difference between the opening and closing prices of the contract. If the price of the currency pair increases, the trader will make a profit. If the price of the currency pair decreases, the trader will incur a loss.

Here are the steps involved in calculating the returns of currency-based perpetual contracts:

1. Determine the opening price of the contract. The opening price of the contract is the price of the currency pair at the time the contract is opened.
2. Determine the closing price of the contract. The closing price of the contract is the price of the currency pair at the time the contract is closed.
3. Calculate the difference between the opening and closing prices. The difference between the opening and closing prices is the profit or loss on the contract.
4. Apply the leverage. The leverage is the amount of money that the trader is borrowing to trade the contract. The leverage will increase the potential profit or loss on the contract.
5. Calculate the return on the contract. The return on the contract is the profit or loss divided by the amount of money that the trader invested in the contract.

Example:

A trader opens a currency-based perpetual contract with a leverage of 10x. The opening price of the contract is 1.00000. The trader closes the contract when the price of the currency pair is 1.00500.

The difference between the opening and closing prices is 0.00500.

The trader's profit is 0.00500 * 10 = 0.05000.

The trader's return on the contract is 0.05000 / 0.01000 = 5%.

Factors that affect the returns of currency-based perpetual contracts:

• The volatility of the currency pair. The more volatile the currency pair, the greater the potential profit or loss on the contract.
• The leverage used. The higher the leverage, the greater the potential profit or loss on the contract.
• The spread. The spread is the difference between the bid price and the ask price of the contract. The wider the spread, the lower the potential profit on the contract.
• The funding rate. The funding rate is a fee that is paid by traders who are holding long positions to traders who are holding short positions. The funding rate can affect the profitability of a contract.

Conclusion:

Currency-based perpetual contracts can be a profitable investment, but they also involve a high level of risk. It is important to understand the risks involved before trading perpetual contracts.