Understanding the Key Terms

mBasis employs a variety of derivatives to execute its basis trading strategy effectively. Understanding the following key terms is essential for grasping the intricacies of this product.

Delta Neutrality

Delta neutral strategies such as mBASIS aim to neutralize the risk associated with price movements of an underlying asset. A portfolio is considered delta-neutral when its total delta (sensitivity to price changes) is zero. In mBASIS, this is achieved by balancing a long position in the spot market with a short position in the perpetual futures market, ensuring that any price changes in the underlying asset do not affect the overall value of the portfolio. Please see here for a scenario of a delta-neutral position.

Perpetual Futures

Perpetual futures contracts are derivatives that, unlike traditional futures, do not have an expiration date. These contracts allow traders to speculate on the price movements of an underlying asset, such as cryptocurrencies, without owning the actual asset. The perpetual contract’s price is kept in alignment with the spot market through a mechanism known as the funding rate. Please see here to learn more about the different tradable perpetual contracts.

Funding Rate

The funding rate is a periodic payment made between traders holding long and short positions in a perpetual futures contract. This payment is generally based on the difference between the perpetual contract price and the spot index price of the underlying asset. If the perpetual contract is trading at a higher price than the spot price (premium), the funding rate will be positive, and long position holders will pay short position holders. Conversely, if the perpetual contract is trading at a lower price than the spot price (discount), the funding rate will be negative, and in turn, short position holders pay long position holders. This mechanism helps ensure that the perpetual futures price is pegged to the spot price.

How You Can Earn Yield from It

mBasis capitalizes on the funding rate by maintaining a delta-neutral position, which involves holding a long position in the spot market and a short position in the perpetual futures market (e.g. basis/carry trade). This strategy allows the portfolio to earn the funding payments from the perpetual contracts consistently, providing a steady yield while minimizing exposure to price movements of the underlying asset.