Detailed guide on how to calculate funding fees in futures contracts

In perpetual contract trading, the funding fee is an important factor that every trader needs to understand clearly. How the funding fee is calculated not only affects your profits but also has a direct impact on risk management. This article will help you grasp every detail of this mechanism.

Basic Mechanism of Funding Fee and Payment Process

Funding fee functions as an automatic balancing mechanism, helping the perpetual contract price stay close to the global spot price. It is similar to interest when holding a margin position.

On modern exchanges, this cost is exchanged directly between buyers and sellers at the end of each settlement period. For example, with an 8-hour cycle, payments occur at 12 noon UTC, 8 a.m. UTC, and 4 p.m. UTC (corresponding to 7 a.m., 3 p.m., and 11 p.m. Vietnam time).

When the funding rate is positive, long position holders pay short position holders. Conversely, when the rate is negative, short sellers pay long buyers. It’s important to note that you only pay or receive the fee if your position remains open at the settlement time. If you close your entire position before the settlement, you will neither pay nor receive this fee.

How to Calculate Funding Fee for Inverse Contracts

For inverse contracts, the funding fee formula is as follows:

Funding Fee = Position Value × Funding Rate

Where: Position Value = Number of Contracts / Reference Price

Let’s consider a specific example: Trader A holds 10,000 BTCUSD contracts with a reference price of $8,000 at the time of fee settlement, with the current funding rate at 0.01%.

First, calculate the position value: 10,000 / 8,000 = 1.25 BTC

Then, calculate the funding fee: 1.25 BTC × 0.01% = 0.000125 BTC

Since the funding rate is positive (0.01%), Trader A must pay 0.000125 BTC, while short position holders with an equivalent number of contracts will receive this amount.

Determining Funding Costs on USDT and USDC Contracts

USDT Contracts

The calculation method for USDT contracts differs slightly from inverse contracts:

Funding Fee = Position Value × Funding Rate

Here: Position Value = Number of Contracts × Reference Price

For example: Trader A holds 10 BTC contracts with a reference price of 8,000 USDT at the time of fee settlement, with a funding rate of 0.01%.

Calculate position value: 10 × 8,000 = 80,000 USDT

Calculate funding fee: 80,000 × 0.01% = 8 USDT

When the funding rate is positive, Trader A pays 8 USDT, and short position holders receive this amount.

USDC Perpetual Contracts

The principle for calculating funding fees for USDC perpetual contracts follows the formula:

Funding Fee = Position Value × Funding Rate

Where: Position Value = Number of Contracts × Reference Price

For example: Trader A holds 10 BTC contracts with a reference price of 50,000 USD at the time of fee settlement, with a funding rate of 0.01%.

Position value = 10 × 50,000 = 500,000 USDC

Funding fee = 500,000 × 0.01% = 50 USDC

Trader A will pay 50 USDC to short position holders, as the funding rate is positive.

Managing Risks Related to Funding Fees

One important note is that the funding fee will be deducted from your available balance. If your balance is insufficient, the fee will be deducted from your margin, increasing the risk of liquidation.

Additionally, if your margin is insufficient to cover the funding fee, your margin balance can turn negative. Although this can happen when your unrealized profits are enough to maintain the position, it’s crucial to monitor the funding fee calculation closely to avoid this situation. It is recommended to maintain sufficient available funds to reduce liquidation risk.

Be aware that each trading symbol has its own funding cycle and limit rates. During significant market volatility, exchanges may temporarily adjust funding rate limits to stabilize the market.

How to Track and Check Funding Fee History

To effectively manage your funding costs, you can review data from your trading history and logs.

Through the Trading History, you can select options related to futures contracts and set the Order Type column to Funding to view specific funding rates. Note that positive fees mean you paid the fee, while negative fees mean you received it.

Another method is using the Transaction Log, where you can filter by Funding Rate Settlement to see clearly the funding fees paid or received at each settlement period.

Understanding how funding fees are calculated not only helps you predict costs but also allows you to optimize your trading strategies and avoid unwanted risk situations.