1. Why arbitrage can have stable returns
AICoin's reverse arbitrage is based on perpetual rate arbitrage, which refers to the simultaneous execution of two trades in the spot and perpetual contracts with opposite directions, equal quantities, and offsetting profits and losses. The goal is to earn the capital rate income in perpetual contract transactions.
1.1 Funding rate description
Funding rate is an important mechanism for perpetual contracts to anchor spot prices, which is used to balance long and short sentiment.
· When the funding rate is > 0, during settlement, longs pay the funding fee, and shorts receive the funding fee;
· When the funding rate is < 0, shorts pay funding and longs receive.
Pay or get funding fee = notional value of the position * funding rate
Funding fees are generally charged for settlement every 8 hours, three times a day. Different exchanges have different settlement charging times. If you close a position before the settlement time, you do not need to pay or obtain funding fees.
1.2 Perpetual Rate Arbitrage
The arbitrage is profited by earning the funding fee settled by the perpetual contract. If only one perpetual contract position is opened, it is very likely that the contract loss is far greater than the capital fee income at settlement, so it is necessary to make an order in the opposite direction in the spot for hedging.
If the funding rate is > 0, if Xiao Ming wants to earn funding fees, he opens a BTC short order in the perpetual contract, and he needs to buy 1 BTC in the spot. If BTC rises, the contract loses and the spot gains; if BTC falls, the contract earns and the spot loses; breakeven is achieved. No fear of currency price fluctuations, if the funding rate remains > 0, Xiao Ming can always charge the perpetual rate with peace of mind.
2. What is reverse arbitrage?
Reverse arbitrage means that when the funding rate is less than 0, long in the perpetual contract and sell the spot leveraged currency borrowing (this is an arbitrage opening operation) to earn funding costs. If the funding rate is always < 0, you can reserve the position and charge the funding fee all the time. When the funding rate becomes >0, the arbitrage closing operation is performed: close the long position of the perpetual contract, buy the spot and return the loan.
Reverse arbitrage, the main income comes from: [funding rate], [spread]; losses are mainly: [transaction fee], [lending interest].
Reverse arbitrage income = accumulated capital charges after opening a position + (closing spread - opening spread) - perpetual contract opening and closing fee - spot trading fee - borrowing interest
Opening spread: The difference between the perpetual contract price and the spot price when opening a position arbitrage.
Closing Spread: The difference between the perpetual contract price and the spot price when the arbitrage is closed.
It can be seen from the above that in the case of reverse arbitrage, the more the accumulated capital rate is negative, the larger the closing spread rate, the smaller the opening spread rate, the lower the transaction fee, the lower the borrowing interest, and the higher the arbitrage income.
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