Hedging a Bitcoin Perpetual Swap with a Quarterly Future
Summary
The document asks whether a long position in a quarterly bitcoin future and a short position in a perpetual swap can remain market neutral. It explains that perpetual swaps have no expiry and use funding payments to help keep their prices near spot. The concern is that the futures basis changes as expiry approaches, so matching contract quantities may not preserve a neutral exposure or produce the desired funding economics.
The response frames a perpetual swap as a contract for difference and compares its carry with that of a tailed future. Under the simplifying assumption that bitcoin basis reflects interest-rate differentials alone, the daily profit and loss of the two instruments can be aligned by dynamically adjusting the futures position as expiry nears. This is a theoretical hedge argument, not evidence of a live strategy. The answer explicitly cautions that the basis has other drivers, so the result does not establish neutrality or profitability in actual crypto markets.
Key ideas
- A perpetual swap has no delivery date and uses funding payments to help track spot prices.
- The basis between a quarterly future and a perpetual swap changes as the future approaches expiry.
- A perpetual swap can be modeled as a contract for difference with implicit carry.
- Under an interest-rate-only basis assumption, a changing futures position can approximately hedge the swap’s carry and price exposure.
- The hedge argument is limited because bitcoin basis may reflect factors beyond interest rates.
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Full text
# Market neutral strategy with quarterly futures and perpetual swaps?
# Market neutral strategy with quarterly futures and perpetual swaps?
### What is a "perpetual swap"?
- In cryptocurrency exchanges, there is a financial product called "perpetual swap". (It is also called as "perpetual futures" or "perpetual contracts" as well)
- It is a kind of futures, except the fact that it does not have a delivery date. That is why it is "perpetual".
- To make the perpetual swap follow the price of that of spot market, we have "funding rate", which is an exchange of interest between long side and short side based on how much futures price deviates from that of spot market. For more detailed explanation, you can refer to Bitmex's information page.
### Can I achieve 'market neutrality' with perpetual swaps and quarterly futures?
- If I buy 1 BTC from a spot market and short it in a perpetual swap market, my position to BTC is neutral because the 1 BTC long and 1 BTC short cancel out. Can I do the same thing with quarterly futures (instead of spot) and perpetual swap?
- The first problem that came to my mind was that the basis between quarterly futures and that of perpetual futures will gets smaller as time passes by. And at the maturity date of the quarterly futures, the basis would be the smallest. (The assumption is that the price of perpetual futures closely follows that of spot.) So if I long quarterly futures, the loss from quarterly futures' long position seems to make it impossible to have 'market neutrality'. One example is provided below.
- Is there a way to be neutral to market by long quarterly futures (instead of spot) and shorting perpetual swap? The reason that I would like to short perpetual swaps is that if you long perpetual swaps, you usually need to pay the funding fee, which is expensive.
## Answer by river_rat (score 2)
https://quant.stackexchange.com/a/63727
A perpetual swap is just a contract-for-difference. Assuming the basis for bitcoin is solely driven by interest rate differentials (spoiler alert: it is not) then the total cost of carry of holding a cfd on bitcoin and holding a tailed future on bitcoin would be the same. The carry costs are just explicit with the future and implicit with the cfd.
Recall that the daily pnl for a CFD is $\Delta S_{t_i} - r S_{t_{i-1}} \Delta t$ and for a tailed future is $e^{-r(T-t_i)} \Delta F_{t_i}$ where $\Delta F_{t_i} = e^{r(T-t_i)}S_{t_i} - e^{r(T-t_{i-1})}S_{t_{i-1}}$ and so the pnl is $S_{t_i} - e^{r\Delta t}S_{t_{i-1}} \approx S_{t_i} - S_{t_{i-1}} - r S_{t_{i-1}} \Delta t$
So a dynamic portfolio consisting of $e^{-r(T-t_i)}$ futures contracts and 1 CFD hedges out.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.