The funding rate is a mechanism used in perpetual futures contracts to ensure the market price stays close to the underlying index price (spot price). Unlike traditional futures, perpetuals have no expiry, so funding payments are exchanged between long and short positions every 8 hours (on most exchanges like Binance, Bybit, and OKX).
The Funding Rate Formula
The funding rate is typically composed of two parts: the Interest Component and the Premium Component. The general logic follows this sequence:
Interest Component: This is the difference between the interest rates of the quote and base currencies. Most exchanges fix this at 0.01% per 8-hour interval.
Premium Component: This reflects the price difference between the perpetual contract and the mark price. If the perpetual is trading higher than the spot price, the premium is positive.
The "Clamp" Function: Exchanges use a "clamp" to keep the funding rate within a specific range relative to the interest component.
Imagine you have a long position worth $10,000. If the calculated funding rate is 0.01%, the math works as follows:
Positive Rate (0.01%): Longs pay shorts. You would pay: $10,000 * 0.0001 = $1.00.
Negative Rate (-0.02%): Shorts pay longs. You would receive: $10,000 * 0.0002 = $2.00.
Why Do Funding Rates Matter?
Funding rates act as an incentive for traders to take the opposing side of the popular trade. When the rate is high and positive, it becomes expensive to hold long positions, encouraging traders to close longs or open shorts, which pushes the perpetual price back down toward the index price.
function calculateFundingRate() {
var premium = parseFloat(document.getElementById('premiumIndex').value);
var interest = parseFloat(document.getElementById('interestRate').value);
var position = parseFloat(document.getElementById('positionSize').value);
var resultsArea = document.getElementById('resultsArea');
if (isNaN(premium) || isNaN(interest)) {
alert("Please enter valid numerical values for Premium and Interest.");
return;
}
// Clamp logic: clamp(Interest – Premium, 0.05, -0.05)
var diff = interest – premium;
var clampedDiff = Math.max(-0.05, Math.min(0.05, diff));
// Final Funding Rate
var finalRate = premium + clampedDiff;
// Display Rate
document.getElementById('finalRate').innerText = finalRate.toFixed(4) + "%";
// Calculate Fee if position is provided
var fee = 0;
if (!isNaN(position)) {
fee = position * (finalRate / 100);
document.getElementById('fundingFee').innerText = "$" + Math.abs(fee).toFixed(2);
} else {
document.getElementById('fundingFee').innerText = "N/A";
}
// Direction Logic
var directionDiv = document.getElementById('paymentDirection');
if (finalRate > 0) {
directionDiv.style.backgroundColor = "#fff5f5";
directionDiv.style.color = "#c53030";
directionDiv.innerText = "Longs Pay Shorts";
} else if (finalRate < 0) {
directionDiv.style.backgroundColor = "#f0fff4";
directionDiv.style.color = "#2f855a";
directionDiv.innerText = "Shorts Pay Longs";
} else {
directionDiv.style.backgroundColor = "#f7fafc";
directionDiv.style.color = "#4a5568";
directionDiv.innerText = "No Funding Exchange";
}
resultsArea.style.display = "block";
}