StrategyIntermediate#Alpha#Derivatives
Funding Arbitrage
F
Definition
A position designed to offset some spot-price exposure while receiving or paying a perpetual contract's venue-defined funding transfers. It is a basis and execution trade, not fixed income, a guaranteed yield, or a fully market-neutral position.
Source reviewed
- dYdX: default funding rates opens in a new tab
Supports: dYdX explains that funding payments incentivize perpetual prices toward an oracle price and that calculation parameters are market and governance specific.
- Kraken: US perpetual futures opens in a new tab
Supports: Kraken explains periodic perpetual funding between traders, as well as product mechanics including fees and liquidations.
- Deribit: funding-rate history opens in a new tab
Supports: Deribit documents that funding-rate values are periodic transfers for named perpetual instruments and exposes historical timestamps rather than a promised future rate.
Concept Diagram
Key Takeaways
1
A spot/perpetual pair only offsets the exposures and contract mechanics that have actually been matched.
2
Funding is a periodic venue-defined transfer that can change, reverse, or differ across markets.
3
Basis, fees, slippage, borrow, collateral, liquidation, transfer, and counterparty risk can dominate received funding.
4
Model two-leg execution and failure scenarios before calling a position delta-neutral or treating funding as yield.
Practical Example
Illustrative only: a user considers buying a specified spot amount and shorting a perpetual with an apparently positive funding rate. Before entry, they verify contract multiplier, collateral, current and next funding terms, mark/index basis, fees, liquidation thresholds, transfer constraints, and how each leg can be exited. If funding reverses, the basis widens, collateral falls, or one venue becomes unavailable, the result can be negative despite the original size match.
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Related Terms
Trading
Funding RateA periodic transfer between open long and short perpetual-futures positions, calculated under a venue's rules to encourage the contract price toward its reference price. It is a carrying cost or receipt, not yield, sentiment proof, or a reversal signal.
Strategy
Autonomous ArbitrageAutomated observation and attempted execution of offsetting trades across venues or instruments when their executable prices differ. A displayed spread is not a guaranteed profit.
Trading
Short SqueezePressure on short sellers to close positions after a sharp price rise or difficulty borrowing the security. Their purchases can add upward pressure, but a price rise or short-interest figure alone does not prove that a squeeze is occurring or predict one.
Trading
DerivativesA contract whose value or payoff is linked to an underlying asset, rate, index, event, or another reference. It is a separate contractual position, not the same thing as holding the referenced asset.
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