The Funding Rate has two main components: the Interest Rate and the Premium/ Discount. Phemex calculates the Premium Index (P) and Interest Rate (I) every minute and then applies an 8-Hour Time-Weighted-Average-Price (TWAP) over the series of minute rates.
The Funding Rate is then calculated with this 8-Hour Interest Rate Component and the 8-Hour Premium/Discount Component. A +/-0.05% dampener is also added.
Funding Rate (F) = Premium Index (P) + clamp (Interest Rate (I) – Premium Index (P), 0.05%, -0.05%)
Hence, if (I – P) is within +/-0.05% then F = P + (I – P) = I. In other words, the Funding Rate will equal the Interest Rate.
This calculated Funding Rate is then applied to a trader’s BTC Position Value to determine the Funding Amount to be paid or received at the Funding Timestamp.
When the Funding Rate is positive, longs pay shorts. When it is negative, shorts pay longs.
Interest Rate Component
Every contract traded on Phemex consists of two instruments: a Base Currency and a Quote Currency. For example, for BTCUSD, the Base currency is BTC, while the quote currency is USD. The Interest Rate is a function of interest rates between these two currencies:
Interest Rate (I) = (Interest Quote Index – Interest Base Index)/Funding Interval
Interest Base Index = The Interest Rate for borrowing the Base currency
Interest Quote Index = The Interest Rate for borrowing the Quote currency
Funding Interval = 3 (Since funding occurs every 8 hours)
Premium / Discount Component
A perpetual contract may trade at a significant premium or discount to the Mark Price. In these situations, a Premium Index will be used to raise or lower the next Funding Rate to levels that are consistent with where the contract is trading. Each contract’s Premium Index is available on the specific instrument’s Contract Specifications page and is calculated as follows:
Premium Index (P) = {[Max (0, Impact Bid Price – Price Index) – Max (0, Price Index – Impact Ask Price)]} / Price Index
Funding occurs every 8 hours at 00:00 UTC, 8:00 UTC and 16:00 UTC. You will only pay or receive funding if you hold a position at one of these times. If you close your position prior to the funding exchange, then you will not pay or receive funding. The funding you pay or receive is calculated as:
Funding = Position Value x Funding Rate