Trading Glossary
Essential terms and concepts for understanding funding rate arbitrage, perpetual futures, and cryptocurrency trading.
APY (Annual Percentage Yield)
The annualized rate of return on an investment, accounting for compound interest. In funding rate arbitrage, APY represents the theoretical yearly return if the current funding rate spread were maintained for a full year. Calculate it as: Rate x Periods Per Day x 365 x 100.
Arbitrage
A trading strategy that profits from price differences of the same asset across different markets or exchanges. Funding rate arbitrage specifically exploits differences in perpetual futures funding rates between exchanges to generate yield without directional price exposure.
Basis
The difference between the perpetual futures price and the spot price of an asset. A positive basis means futures trade at a premium to spot; negative basis means futures trade at a discount. Basis affects funding rates and can indicate market sentiment.
Basis Points (bps)
A unit of measurement equal to 1/100th of a percent (0.01%). Used to express small percentage changes in funding rates. For example, 10 bps = 0.10% = 0.001. Converting: Percentage x 100 = bps, or bps / 100 = Percentage.
Cross Margin
A margin mode where your entire account balance serves as collateral for all positions. This provides more buffer against liquidation but means losses in one position can affect your ability to maintain others. Compare with Isolated Margin.
Delta
A measure of how much a position's value changes relative to price movement of the underlying asset. A delta of 1 means the position moves 1:1 with price. Delta-neutral strategies aim for a combined delta of 0.
Delta-Neutral
A position strategy with zero net exposure to price movements. In funding rate arbitrage, you achieve this by holding equal-sized long and short positions on the same asset. Gains on one side offset losses on the other, leaving only funding payments as profit/loss.
DEX (Decentralized Exchange)
A cryptocurrency exchange that operates without a central authority, using smart contracts on a blockchain. DEXs like Hyperliquid, Drift, and GMX offer perpetual futures trading with transparent, on-chain settlement. PerpRates monitors multiple DEXs.
Funding Interval
The time period between funding rate settlements. Most exchanges use 8-hour intervals (00:00, 08:00, 16:00 UTC), resulting in 3 funding payments per day. Some exchanges like Hyperliquid settle hourly. The interval affects annualized return calculations.
Funding Rate
A periodic payment exchanged between long and short position holders on perpetual futures. Positive rates mean longs pay shorts; negative rates mean shorts pay longs. Rates keep perpetual prices aligned with spot prices and create arbitrage opportunities when they differ between exchanges.
Index Price
A volume-weighted average price calculated from multiple spot exchanges. Used as a reference for the 'true' market price of an asset. Perpetual futures use index price to calculate funding rates and as a baseline for mark price.
Initial Margin
The minimum collateral required to open a leveraged position. With 10x leverage, initial margin is 10% of position size. Higher leverage = lower initial margin required but higher liquidation risk. Always maintain margin above maintenance levels.
Isolated Margin
A margin mode where collateral is allocated to individual positions separately. If liquidated, only that position's margin is lost, protecting other positions and unused balance. Provides more control but less buffer than Cross Margin.
Leverage
The ratio of position size to required collateral. 5x leverage means you control $5,000 of assets with $1,000 collateral. Higher leverage amplifies both gains and losses, increasing liquidation risk. For arbitrage, 3-5x is generally recommended.
Liquidation
Forced closing of a position when collateral falls below maintenance margin requirements due to adverse price movement. Even delta-neutral arbitrage faces liquidation risk since each leg is held separately. Use conservative leverage and monitor both positions.
Liquidation Price
The price at which your position will be automatically closed by the exchange. Calculated based on your entry price, position size, leverage, and available margin. Know your liquidation prices and set alerts well before these levels.
Long Position
A position that profits when the asset price increases. In perpetual futures, going long means you buy contracts expecting the price to rise. In funding rate arbitrage, you typically go long on the exchange with the lower funding rate.
Maintenance Margin
The minimum collateral you must maintain to keep a position open. If your margin falls below this level, liquidation is triggered. Maintenance margin is lower than initial margin, providing some buffer for price movements.
Maker Fee
The fee charged when your order adds liquidity to the order book (limit orders that don't immediately execute). Maker fees are typically lower than taker fees, often 0.01-0.02% on DEXs. Using limit orders can significantly reduce trading costs.
Mark Price
The price used by exchanges to calculate unrealized P&L and trigger liquidations. Typically derived from the index price plus a moving average of the basis. Mark price prevents manipulation-induced liquidations by smoothing out short-term price spikes.
Open Interest
The total number of outstanding derivative contracts (perpetual futures) that haven't been settled. High open interest indicates a liquid market with active trading. Check open interest before entering large positions to ensure you can exit without significant slippage.
Perpetual Futures (Perps)
Derivative contracts that track an underlying asset's price without an expiration date. Unlike traditional futures, perpetuals use funding rates to anchor their price to spot. They're the primary instrument for funding rate arbitrage strategies.
Short Position
A position that profits when the asset price decreases. In perpetual futures, going short means you sell contracts expecting the price to fall. In funding rate arbitrage, you typically go short on the exchange with the higher funding rate.
Slippage
The difference between expected trade price and actual execution price. Occurs due to price movement between order placement and execution, or insufficient liquidity. Large orders or low-liquidity markets experience more slippage. Factor this into profit calculations.
Spread
In funding rate arbitrage, the difference between funding rates on two exchanges for the same asset. A spread of 10 bps means you can potentially earn 10 bps per funding period by being long on the low-rate exchange and short on the high-rate exchange.
Taker Fee
The fee charged when your order removes liquidity from the order book (market orders or limit orders that execute immediately). Taker fees are typically higher than maker fees, often 0.03-0.06% on DEXs. Consider this when calculating trade profitability.
Unrealized P&L
Profit or loss on open positions that hasn't been locked in yet. Calculated using mark price. In funding rate arbitrage, your combined unrealized P&L should stay near zero (delta-neutral), while realized funding payments accumulate as profit.
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