Put-Call-Funding Parity describes an arbitrage relationship in cryptocurrency derivatives markets that links the prices of European-style put options, call options, the underlying spot crypto asset, and the associated funding rate for perpetual futures contracts. It is a fundamental principle asserting that a synthetic long position created from options should theoretically yield the same profit/loss as holding the spot asset adjusted for funding costs.
Mechanism
The mechanism is an extension of the traditional put-call parity theorem, modified to account for the unique funding rate mechanism prevalent in crypto perpetual futures markets. Specifically, a portfolio consisting of a long call, a short put with the same strike and expiration, and an appropriate amount of collateral will, in theory, replicate the payoff of a long position in the underlying asset, accounting for the continuous funding costs.
Methodology
This parity serves as a critical tool for options traders and quantitative analysts to identify and capitalize on mispricings between related derivative instruments and the underlying spot market. By comparing actual market prices to the theoretical parity relationship, participants can execute arbitrage strategies. This methodology also provides a robust framework for consistent pricing and risk management across crypto options and funding markets.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
