Perpetual Futures Pricing, Funding, and Arbitrage

Summary

This document explains how perpetual futures differ from fixed-maturity contracts: they provide leveraged exposure without rollover or direct ownership, but have no maturity date forcing convergence to spot. A periodic funding payment between longs and shorts is linked to the difference between perpetual and spot prices and is intended to limit that gap. The authors derive no-arbitrage prices in frictionless markets and bounds when trading costs are present.

The empirical discussion reports that crypto perpetuals deviate more from theoretical prices than traditional currency markets, that deviations move together across currencies, and that they decline over time. An implied arbitrage strategy is reported to have high Sharpe ratios. The document gives no sample period, data sources, execution assumptions, or numerical performance figures, and frictionless pricing may not capture funding, liquidity, and transaction constraints in practice. The summary therefore conveys the pricing framework and reported patterns without enough information to evaluate implementation.

Key ideas

• Perpetual futures provide leveraged exposure without contract rollover or asset ownership.
• Funding payments are tied to the perpetual–spot price difference and are intended to limit divergence.
• The document derives frictionless no-arbitrage prices and trading-cost bounds.
• Reported crypto price deviations exceed those in traditional currency markets, co-move across currencies, and diminish over time.
• An arbitrage strategy based on implied mispricing is reported to have high Sharpe ratios, though implementation details are absent.

Tags

# Fundamentals of Perpetual Futures


# Fundamentals of Perpetual Futures









Perpetual futures are the most popular cryptocurrency derivatives. Perpetuals offer leveraged exposure to their underlying without rollover or direct ownership. Unlike fixed-maturity futures, perpetuals are not guaranteed to converge to the spot price. To minimize the gap between perpetual and spot prices, long investors periodically pay shorts a funding rate proportional to this difference. We derive no-arbitrage prices for perpetual futures in frictionless markets and bounds in markets with trading costs. Empirically, deviations from these prices in crypto are larger than in traditional currency markets, comove across currencies, and diminish over time. An implied arbitrage strategy yields high Sharpe ratios.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.