How spot-perp and cross-exchange hedges earn
A hedged position holds two equal and opposite legs, so price moves cancel out. What it earns or pays comes from the spread and from funding. This page explains both parts and the costs to subtract.
Two legs
The both legs are positions in the same asset, equal in size and opposite in direction: one long, one short. When the price rises, the long leg gains and the short leg loses. When it falls, the reverse happens. The two roughly cancel. Three arbitrage types are common:
Long perpetual / Short perpetual: one perpetual leg on each of two exchanges.
Long spot / Short perpetual: buy spot and short the perpetual.
Long perpetual / Short spot: go long the perpetual and sell spot borrowed on margin.
The spread part
Go long where the price is lower and short where it is higher, then close both legs once the two prices move together. This part is roughly the Open spread minus the Close spread. What is a cross-exchange spread explains how both spreads are priced.
Example: an open spread of 0.30% and a close spread of 0.05% at exit leave about 0.25% from the spread, before fees.
The funding part
When the funding rate is positive, shorts receive and longs pay. Put the short leg on the market with the higher rate and the long leg on the market with the lower rate, or on spot. Each settlement then pays or charges the difference between the two. Spot pays no funding fee. Rates change every period, so the difference can narrow or reverse. See What is the funding rate.
Costs to subtract
| Cost | |
|---|---|
| Fees | Two legs at entry and two at exit, four trades in all. Each taker order pays the taker fee and each maker order the maker fee. |
| slippage | On a thin book a market order fills through several levels, and the filled spread comes in below the quoted one. |
| Funding paid | When the funding diff reverses, the position pays net funding every period. |
| Borrow interest | A spot short sells borrowed coins, and interest accrues. ZML Trade charges borrow interest on every margin leg from its combo position: the short leg at the base coin’s rate and the long leg at the quote coin’s rate, whether or not the exchange actually lent anything. |
Putting it together
The result of a trade is roughly the spread part minus fees, plus funding, minus borrow interest. Read the two parts together. A position opened for funding starts behind if its open spread is negative. A position opened for the spread gains or loses funding while it is held.
ZML Trade lists a combo’s PnL by the same items: spread profit, trading fees, fee rebate, funding fees, borrow interest and network fees.
For each type, see Funding rate arbitrage, Cross-exchange spread arbitrage and Spot-perpetual basis. For the risks, see The main risks of arbitrage.