What is Funding Rate Arbitrage? How is profit generated?

 1. What is Funding Rate Arbitrage?

Funding rate is exchanged between buyers and sellers. After each funding interval, the exchange acts as a middleman to transfer the funding fee from long positions (buyers) to short positions (sellers), or vice versa, depending on whether the funding rate is positive or negative.

Crypto exchanges do not collect any of these fees themselves; they simply calculate and publish the applicable funding rate for each interval. As a result, the funding rate is neutral from the exchange's perspective—it doesn’t generate profit for them.

Key approaches to this Funding Rate Arbitrage strategy include: Spot vs Perpetual Futures, Perpetual Futures vs Perpetual Futures,...

2. How is profit generated?

• Funding Rate on the same exchange

if you open both long and short positions simultaneously on the same exchange, your net funding rate will be zero.

The only exception is when you go long via spot and short via perpetual futures, since the spot market doesn’t incur any funding fees like the perpetual futures market does.

However, the profit margin from this strategy is usually quite small. That said, it's a popular approach used by many trading tools and bots in the market because it’s relatively easy to implement.

• Cross-exchange Funding Rate

The general formula used to calculate the Funding Rate is:

Funding Rate = Premium Index + Clamp(Interest Rate - Premium Index, min, max)




From this formula, we can immediately see that the method for calculating the Funding Rate differs across exchanges because many variables are exchange-dependent.

-> Funding Rate Interval: Each exchange and each token (or coin) has a different calculation cycle (funding interval), which could be every 1h, 2h, 4h, or 8 hours. This is always clearly stated in the status bar or the funding rate history.

-> Exchange-Specific Variables: The mark price, the base interest rate, trading volume, liquidity, and the trading behavior of users are all unique to each exchange.

Therefore, the funding rate can sometimes vary between exchanges. Based on this mechanism.

XAPY offers a comprehensive toolkit for Funding Rate Arbitrage, including scanning, backtesting, strategy creation, execution, and P&L analytics—all integrated on XAPY.io.