Funding Rate

What is funding rate, why is it important and how to calculate

Funding Mechanism

Since perpetual contracts don't have an expiry date and aren't physically delivered, NFEX uses a funding mechanism to maintain the contract's price close to the underlying asset's floor price. Funding fees are periodic payments with a certain rate, known as the funding rate, calculated based on the difference between the contract's mark price and the NFEX index price (NFEXI). If the funding rate is positive, long traders pay funding fees to short traders, and if it's negative, short traders pay funding fees to long traders.

At NFEX, funding payments are exchanged and settled every hour and are included in the realized PnL for the position. Funding occurs only when traders hold a position under the contract during the funding time. If traders close out all their positions before the funding time, they don't pay or receive funding fees.

The funding rate and countdown timer to the next funding can be found on the NFEX trading page.

Funding Rate Calculation

The Funding Rate Calculation works as follows:

At the start of each hour, if the funding rate is positive, a long trader pays ETH, and if it's negative, a short trader pays ETH. The amount is equal to:

$$Funding= Position Notional Value\times Funding Rate$$

Where:

$Position Notional Value = Mark Price\times Position Size$

Funding Rate Calculation

At the start of the one-hour funding period, NFEX calculates the real-time funding rate and cumulative funding rate every 3 seconds as references for the final funding rate at the funding time. The calculation methodology is as follows:

Firstly, NFEX will calculate the real-time funding rate of the contract every 3 seconds.

The Current Funding Rate formula is as below:

$$FR_{current} = \frac{( Mark Price-NFEXI){\div} NFEXI}{24}$$

Then the system will calculate the Cumulative Funding Rate(CFR) at the current timestamp (T). Formula:

$$CFR_{current} = CFR_{last} + FR_{current}\times ( T_{current} - T_{last})$$

Where:

$Timestamp Interval$ ≈ 3 seconds

Finally using this methodology, the actual funding rate is calculated up until the end of the one-hour funding interval.

Formula:

$$FR_{final} = \frac{CFR_{current} - CFR_{lastOneHour}}{T_{current} - T_{lastOneHour}}$$

Please note that at the beginning of the funding period, since there is no previous funding rate, the cumulative funding rate will be 0. Therefore, at this timestamp, NFEX will use the initial funding rate as the actual funding rate.

Funding Rate Cap and Floor

In order to prevent funding rates from deviating significantly from the norm, NFEX's funding mechanism sets cap and floor rates at ± 2%.

Please Note:

1. NFEX does not charge any funding fees as the funding payments are directly made between the long and short traders.

2. NFEX reserves the right to adjust the cap and floor of the funding rate for a perpetual contract in case of extreme market conditions.

3. If there is significant volatility in the market, NFEX may also adjust the funding interval of a perpetual contract to a different interval than the default one-hour funding interval.

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