What Is the Premium Index? How Perp Premiums Drive Funding

The premium index measures how far a perpetual futures contract is trading above or below its spot index price, expressed as a percentage of that index. It is the main input to the funding rate on most exchanges. A positive premium index pushes funding up so longs pay shorts, and a negative one pushes funding down so shorts pay longs.

Key takeaways

• Premium index ≈ (perp price − index price) ÷ index price.
• Exchanges usually use impact bid and impact ask prices, not the last trade, to make it harder to manipulate.
• The premium index is sampled often and averaged over each funding interval.
• It is the core input to funding, combined with an interest rate component.
• It is the perp version of basis, and a close cousin of the mark price.

Why perps need a premium index

Perpetual futures never expire, so nothing forces their price to meet spot on a fixed date. Exchanges solve this by charging funding, and funding needs a measurable signal of how far the perp has drifted. That signal is the premium index.

The reference point is the index price, a weighted average of spot prices across several exchanges. See mark price vs index price for how the index is built. When the perp trades above the index, traders are paying extra for long exposure. When it trades below, traders are paying extra for short exposure.

How the premium index is calculated

The simplest version is:

Premium index = (perp price − index price) ÷ index price

In practice, exchanges do not use the last traded price, because one small trade could move it. Many use the impact bid and impact ask instead. These are the average fill prices for selling or buying a fixed notional amount against the order book. The size is set by the exchange and differs by market.

A common construction, used by Binance and several other exchanges, looks like this:

Premium index = [max(0, impact bid − index) − max(0, index − impact ask)] ÷ index

Read it in three cases:

Order book position	Result
Impact bid above index	Positive premium: buyers are paying above spot
Impact ask below index	Negative premium: sellers are accepting below spot
Index between impact bid and ask	Premium is zero

The third case matters. If spot sits inside the perp's own bid-ask spread, the perp is not meaningfully mispriced, and the premium index is zero.

Worked example

Assume the BTC index price is $60,000, and the order book gives:

• Impact bid = $60,036
• Impact ask = $60,048

Plug these into the formula:

• max(0, 60,036 − 60,000) = 36
• max(0, 60,000 − 60,048) = 0
• Premium index = (36 − 0) ÷ 60,000 = 0.0006 = 0.06%

Now a discount case. Assume the index is still $60,000, with:

• Impact bid = $59,952
• Impact ask = $59,970

Then:

• max(0, 59,952 − 60,000) = 0
• max(0, 60,000 − 59,970) = 30
• Premium index = (0 − 30) ÷ 60,000 = −0.0005 = −0.05%

These are single samples. The number that feeds funding is the average of many such samples across the interval.

Sampling and averaging

A single snapshot could be distorted by a brief spike, so exchanges sample the premium index frequently, for example every few seconds or every minute, and average the samples over the funding interval. Some use a simple average, others a time-weighted one that gives more weight to recent samples. On an 8-hour interval, the funding rate you pay reflects roughly eight hours of premium history, not the price at the funding timestamp.

This is also why the "predicted" or "estimated" funding rate shown on exchanges changes during the interval. It is a running estimate based on the samples collected so far.

From premium index to funding rate

Most exchanges combine the averaged premium index with a small interest rate component and then apply limits. A widely used form is:

Funding rate = premium index + clamp(interest rate − premium index, −0.05%, +0.05%)

With a typical interest component of 0.01% per 8 hours, a premium index of 0.06% gives:

• interest − premium = 0.01% − 0.06% = −0.05%, which sits at the clamp limit
• Funding = 0.06% + (−0.05%) = 0.01%

Small premiums get absorbed by the clamp, and funding stays at the baseline. Only larger premiums move funding away from it. The full mechanics, including caps and interval differences, are covered in how funding rates are calculated. Exact formulas vary by exchange.

Premium index vs related measures

Measure	What it compares	Used for
Premium index	Perp impact prices vs index	Funding rate
Mark price	Index plus a premium-based adjustment	Unrealized PnL, liquidation
Basis	Futures price vs spot	Carry and basis trades
Funding rate	Premium plus interest, clamped and capped	Payments between longs and shorts

What the premium index tells traders

• Persistent positive premium: leveraged longs are crowded, and shorts collect funding. This is where cash-and-carry and funding strategies look for yield.
• Persistent negative premium: shorts are crowded or hedging demand is high, and longs collect funding.
• Premium spikes: fast moves can widen the premium briefly. Because funding uses an average, a short spike may have little effect on the next payment.

Common mistakes

• Treating the current premium as the next funding rate. Funding uses an average over the interval plus the interest component and limits.
• Using the last price to estimate premium. Exchanges use impact prices and their own index, which can differ from what a chart shows.
• Assuming all venues use the same formula. Sampling rates, impact sizes, clamps and caps all differ.

How ArbTide helps

The perp premium strategy page explains how traders approach perps trading at a premium or discount to spot, and the live funding rates page shows the funding each perp is paying right now, normalized to APR.