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Education / Interactive Walkthrough

Funding Rate Arbitrage

Walk through a cash-and-carry arbitrage trade step by step. See how delta-neutral positions harvest funding rate payments, and simulate your own P&L.

Illustrative and educational only. No arbitrage is risk-free -- see the risks below.

Step-by-Step Walkthrough

1

Buy Spot Asset

Purchase the underlying asset (e.g., BTC) on the spot market. This gives you long exposure that will be hedged in the next step.

2

Short the Perpetual

Open a short position on the perpetual futures contract for the same notional value. This creates a delta-neutral position -- price movements cancel out.

3

Collect Funding Payments

When funding is positive, longs pay shorts. As a short holder, you receive funding payments every 8 hours while your spot position hedges price risk.

4

Close Both Positions

When funding rates decline or flip negative, unwind both positions. Sell spot, close the perp short. Your profit is the accumulated funding payments.

Spot Market
1 BTC
Long Spot
You own the asset
Delta: +1.0 (unhedged)
Delta Neutral Setup
LONG SPOT +1 BTC
=
SHORT PERP -1 BTC
Net Delta: 0.0 (hedged)
Price goes up or down -- your P&L stays approximately flat. The legs largely offset, leaving you close to market-neutral.
Funding Payments Flow
LONGS
Pay funding
YOU
Receive funding
+$0.00
accumulated every 8 hours
Positive funding rate = longs pay shorts = you earn
Unwind & Profit
Sell Spot
Close Short
Net Profit
Funding Collected
Spot P&L ~ $0 (idealized hedge)
In the idealized hedge, price moves largely offset and profit comes mostly from accumulated funding, less fees and costs. No arbitrage is risk-free -- see risks below.

Trade Structure

Spot Long
+1 BTC
Own the asset
Perp Short
-1 BTC
Hedge exposure
Delta Neutral
+ Funding Income
Market-neutral yield
Price Risk
Largely offset. Spot gains broadly offset perp losses and vice versa, though not perfectly.
Income Source
Funding payments from longs to your short position every 8h.
Best When
Funding rates are consistently positive (bullish markets).

P&L Simulator

Parameters

$100,000
$10K$1M
0.0100%
-0.05%0.15%
30 days
1 day365 days
+0%
-50%+100%
Quick Presets
Funding Income
$900.00
Hedged Price P&L
~$0.00
Idealized; legs rarely cancel exactly
Net Profit
$700.00
Annualized Return
8.52%
Illustrative; assumes rate persists. Not guaranteed.

Cumulative P&L Over Time

Funding Net

Detailed Breakdown

Position Size $100,000
Funding Rate (8h) 0.0100%
Funding Periods (3x daily) 90
Payment per Period $10.00
Total Funding Income $900.00
Est. fees & costs (illustrative) -$200.00
Spot P&L (idealized hedge) ~$0.00
Perp P&L (idealized hedge) ~$0.00
Net Profit (after est. costs) $700.00
Annualized Return 8.52%

Illustrative only. Fees & costs use a conservative 0.05% taker fee per fill (4 fills round-trip). The hedged spot/perp legs are shown idealized; in practice basis moves, execution slippage and liquidation risk mean they do not perfectly cancel. Annualized return assumes the selected funding rate persists for the full period — real funding rates fluctuate, average far lower, and are not compounding or guaranteed.

What Can Go Wrong

Funding Rate Flips

If funding turns negative, you start paying instead of receiving. This erodes profits and can turn the trade unprofitable.

Mitigation
Monitor funding rates across venues. Set alerts for rate changes. Have exit rules before opening the position.

Margin / Liquidation Risk

If the asset rallies sharply, your perp short loses value. Without sufficient margin, you risk liquidation before funding accumulates.

Mitigation
Use low leverage (1-2x). Keep excess margin. Size positions conservatively relative to account equity.

Execution Risk

Slippage when entering or exiting. If you can't open both legs simultaneously, you have temporary directional exposure.

Mitigation
Use limit orders. Execute both legs as close together as possible. Trade liquid assets with tight spreads.

Exchange / Counterparty Risk

Your funds are held on the exchange. Exchange insolvency, hacks, or withdrawal freezes can result in total loss regardless of trade performance.

Basis Convergence / Divergence

The spread between spot and perp can widen temporarily, causing mark-to-market losses on the perp side even though the trade is fundamentally hedged.