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What are the long-term holding costs of a perpetual contract?
Long-term holding costs for perpetual contracts accumulate from ongoing funding rates, margin interest payments, and bid-ask spreads.
Oct 30, 2024 at 09:55 am
What are the long-term holding costs of a perpetual contract?
Perpetual contracts are a type of derivative contract that allows traders to speculate on the future price of an asset without having to take ownership of the underlying asset. Perpetual contracts are typically traded on margin, which means that traders can use leverage to increase their potential profits. However, there are also some costs associated with holding a perpetual contract, including the funding rate, the margin interest rate, and the spread.
Funding rate
The funding rate is a fee that is paid or received by traders who hold a perpetual contract. The funding rate is determined by the difference between the interest rate on the underlying asset and the interest rate on the margin loan. If the interest rate on the underlying asset is higher than the interest rate on the margin loan, then traders who are long the perpetual contract will pay the funding rate to traders who are short the perpetual contract. Conversely, if the interest rate on the underlying asset is lower than the interest rate on the margin loan, then traders who are short the perpetual contract will pay the funding rate to traders who are long the perpetual contract.
Margin interest rate
The margin interest rate is the interest rate that traders pay on their margin loan. The margin interest rate is typically higher than the interest rate on a traditional loan, and it can vary depending on the exchange and the trader's account balance.
Spread
The spread is the difference between the bid price and the ask price of a perpetual contract. The spread is typically expressed in terms of pips, and it can vary depending on the liquidity of the market.
Example
Let's say that you want to buy a perpetual contract for Bitcoin. The current price of Bitcoin is $10,000, and the funding rate is 0.01%. You have a margin balance of $10,000, and the margin interest rate is 10%.
If you hold the perpetual contract for one day, you will pay the following costs:
- Funding rate: $10,000 x 0.01% = $1
- Margin interest rate: $10,000 x 10% x 1/365 = $2.74
Total cost: $3.74
The total cost of holding the perpetual contract for one day is $3.74. This cost is relatively small, but it can add up over time if you hold the perpetual contract for a long period of time.
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