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Fundamentals of Perpetual Futures
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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.
Forward citations
Cited by 2 Pith papers
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Funding-Aware Optimal Market Making for Perpetual DEXs
A funding-aware HJB model for perpetual DEX market making improves simulated ETH/BTC performance and reduces inventory risk versus classical Avellaneda-Stoikov.
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Dynamic Collateral Control for Permissionless Spot Perpetual Basis Trading
This work derives risk-constrained static and asymmetric dynamic collateral control rules for DeFi spot-perpetual basis trading, validated via Monte Carlo simulations and historical backtests showing dependence on fun...
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