Perpetual futures
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In
finance Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of fina ...
, a perpetual futures contract, also known as a perpetual swap, is an agreement to non-optionally buy or sell an
asset In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
at an unspecified point in the future. Perpetual futures are cash-settled, and differ from regular
futures Futures may mean: Finance *Futures contract, a tradable financial derivatives contract *Futures exchange, a financial market where futures contracts are traded * ''Futures'' (magazine), an American finance magazine Music * ''Futures'' (album), a ...
in that they lack a pre-specified delivery date, and can thus be held indefinitely without the need to
roll over Rollover or roll over may refer to: Arts and entertainment * ''Rollover'' (film), a 1981 American political thriller *''Roll Over'', a 1992 album by Hound Dog * "Roll Over", a 2006 song by Zico Chain * "Roll Over", a 1989 song by Steven Wayne ...
contracts as they approach expiration. Payments are periodically exchanged between holders of the two sides of the contracts, long and short, with the direction and magnitude of the settlement based on the difference between the contract price and that of the
underlying In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be use ...
asset, as well as, if applicable, the difference in
leverage Leverage or leveraged may refer to: *Leverage (mechanics), mechanical advantage achieved by using a lever * ''Leverage'' (album), a 2012 album by Lyriel *Leverage (dance), a type of dance connection *Leverage (finance), using given resources to ...
between the two sides. Perpetual futures were first proposed by economist
Robert Shiller Robert James Shiller (born March 29, 1946) is an American economist, academic, and author. As of 2019, he serves as a Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management's International Center fo ...
in 1992, to enable
derivatives The derivative of a function is the rate of change of the function's output relative to its input value. Derivative may also refer to: In mathematics and economics * Brzozowski derivative in the theory of formal languages * Formal derivative, an ...
markets for
illiquid In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the ...
assets. Shiller, Robert J, 1993.
Measuring Asset Values for Cash Settlement in Derivative Markets: Hedonic Repeated Measures Indices and Perpetual Futures
"
Journal of Finance ''The Journal of Finance'' is a peer-reviewed academic journal published by Wiley-Blackwell on behalf of the American Finance Association. It was established in 1946 and is considered to be one of the premier finance journals. The editor-in-chief ...
,
American Finance Association The American Finance Association (AFA) is an academic organization whose focus is the study and promotion of knowledge of financial economics. It was formed in 1939. Its main publication, the ''Journal of Finance'', was first published in 1946. ...
, vol. 48(3), pages 911-931, July.
However, perpetual futures markets have only developed for
cryptocurrencies A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank A bank is a financial i ...
, following their introduction in 2016 by
BitMEX BitMEX is a cryptocurrency exchange and derivative trading platform. It is owned and operated by HDR Global Trading Limited, which is registered in the Seychelles. History BitMEX was founded in 2014 by Arthur Hayes, Ben Delo, and Samuel Reed, w ...
. Cryptocurrency perpetuals are characterised by the availability of high leverage, sometimes over 100 times the margin, and by the use of auto-deleveraging, which compels high-leverage, profitable traders to forfeit a portion of their profits to cover the losses of the other side during periods of high market volatility, as well as insurance funds, pools of assets intended to prevent the need for auto-deleveraging. Perpetuals serve the same function as contracts for difference (CFDs), allowing indefinite, leveraged tracking of an underlying asset or flow, but differ in that a single, uniform contract is traded on an exchange for all time-horizons, quantities of leverage, and positions, as opposed to separate contracts for separate quantities of leverage typically traded directly with a broker.


History

Holding a futures contract indefinitely requires periodically rolling over the contract into a new one before the contract's expiry. However, given that futures prices typically differ from
spot Spot or SPOT may refer to: Places * Spot, North Carolina, a community in the United States * The Spot, New South Wales, a locality in Sydney, Australia * South Pole Traverse, sometimes called the South Pole Overland Traverse People * Spot (produ ...
prices, repeatedly rolling over contracts creates significant
basis risk Basis risk in finance is the risk associated with imperfect hedging due to the variables or characteristics that affect the difference between the futures contract and the underlying "cash" position. It arises because of the difference between th ...
, leading to inefficiencies when used for hedging or speculation. In an attempt to remedy these ills, the Chinese Gold and Silver Exchange of
Hong Kong Hong Kong ( (US) or (UK); , ), officially the Hong Kong Special Administrative Region of the People's Republic of China ( abbr. Hong Kong SAR or HKSAR), is a city and special administrative region of China on the eastern Pearl River Delt ...
developed an "undated futures" market, wherein one-day futures would be rolled over automatically, with the difference between future and spot prices settled between the counterparties.Gehr Jr, Adam K. " Undated futures markets." ''The Journal of Futures Markets (1986-1998)'' 8, no. 1 (1988): 89. In 1992, Robert Shiller proposed perpetual futures, alongside a method for generating asset-price indices using
hedonic regression In economics, hedonic regression, also sometimes called hedonic demand theory, is a revealed preference method for estimating demand or value. It decomposes the item being researched into its constituent characteristics, and obtains estimates of t ...
, accounting for unmeasured qualities by adding dummy variables that represent elements of the index, indicating the unique quality of each element, a form of
repeated measures design Repeated measures design is a research design that involves multiple measures of the same variable taken on the same or matched subjects either under different conditions or over two or more time periods. For instance, repeated measurements are c ...
. This was intended to permit the creation of derivatives markets for illiquid, infrequently-priced assets, such as single-family homes, as well as untraded indices and flows of income, such as labour costs or the
consumer price index A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. Overview A CPI is a statistica ...
.


Mechanism

Perpetual futures for the value of a cash flow, dividend or index, as envisioned by Shiller, require the payment of a daily settlement, intended to mirror the value of the flow, from one side of the contract to the other. At any day ''t'', the dividend s_, paid from shorts to longs, is defined as: s_=(f_-f_t)+(d_-r_tf_t) where f_t is the price of the perpetual at day ''t'', d_t is the dividend paid to owners of the underlying asset on day ''t'', and r_t is the return on an alternative asset (expected to be a short-term, low-risk rate) between time ''t'' and ''t+1''.


See also

*
Futures contract In finance, a futures contract (sometimes called a futures) is a standardized legal contract to buy or sell something at a predetermined price for delivery at a specified time in the future, between parties not yet known to each other. The asset ...
* Contract for difference


References

{{derivatives market Derivatives (finance) Futures markets Cryptocurrencies