About Funding Rate

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The Funding Rate is comprised of two main parts: Premium and Interest


Premium

Let’s learn about Premium first. Futures trading price in AAX (AAX price) may differ from the spot market (index price) due to differences in market forces. As a result, traders in both long and short position have to be compensated due to the actual market prices in the spot market. In this case, AAX futures contracts auto-roll every 8-hours depending on the AAX price and index price at the time. Premium is calculated on the unrealised PnL because the trader has not closed the position. The unrealised PnL represents the trader’s position at the time the rollover takes places.

Interest

Now onto interest, by getting a long position in e.g. BTCUSD, it is equivalent to a trader borrowing USD to buy BTC in the spot market (vice versa if in short position). Due to the fact that the borrowing cost of BTC the base currency is much higher than USD the quote currency, it will be a no brainer for all traders to go long to take advantage of the lower interest rate to borrow USD to buy BTC.
In order to maintain a balanced supply of long and short futures contracts, AAX’s futures contracts auto roll-over every eight hours to make the traders in short BTC position to pay to those in long BTC position. This is known as Interest.

Every contract traded on AAX consists of two instruments: a Base currency and a Quote currency.
Take BTCUSD as an example, assuming BTC rate = 0.025% (per day), USDT rate = 0.001% (per day), funding_period = 3 (8 hours , 3 times a day)
Delta_Interest= (Quote Currency Rate - Base Currency Rate) / funding_period= (0.001% - 0.025%) / 3= - 0.008%
Funding takes into account of the differences between AAX futures prices and spot prices (Premium), and the differences in interest rate so that either the long position traders pay to the short position traders or vice versa, depending on market conditions.
Now the biggest concern for traders is whether they need to pay or is eligible to receive interest. Simply put, when the Funding is positive, longs pay shorts. When it is negative, shorts pay longs.

For example

A trader has long position of 10000 contracts. AAX price = 4000 and Index price = 4100. Interest rate difference = - 0.008%
Rate payable by long trader = 10000 x ( (1-0.00008) / 4100 - 1 / 4000 ) = - 0.061 BTC
Long trader should receive 0.0061 BTC in this funding interval.
AAX does not charge any fees on funding; it is exchanged directly peer-to-peer.

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