When must perpetual contracts be settled or expire?

Perpetual futures are financial instruments designed to mimic the price movements of the underlying asset they represent. Unlike traditional futures contracts, which have a specific expiration date and require settlement, perpetual futures do not expire or settle. This feature allows traders to hold their positions indefinitely, providing greater flexibility in their trading strategies.

The primary objective of perpetual futures is to maintain a close correlation with the price of the underlying asset. To achieve this, perpetual futures contracts are subject to a funding mechanism. This mechanism adjusts the price of the futures contract periodically to ensure it remains aligned with the spot price of the underlying asset. This helps to minimize any divergence between the futures price and the spot price, enhancing the efficiency of the market.

The funding mechanism works by charging a funding rate to the long or short side of the market, depending on the relationship between the futures price and the spot price. If the futures price is trading at a premium to the spot price, the funding rate will be positive, and long traders will pay this rate to short traders. Conversely, if the futures price is trading at a discount to the spot price, the funding rate will be negative, and short traders will pay this rate to long traders.

One of the key advantages of perpetual futures is their ability to offer high leverage. Traders can control large positions with relatively small deposits, amplifying their potential profits but also increasing their risk exposure. This makes perpetual futures an attractive option for experienced traders who are comfortable with high-risk, high-reward scenarios.

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