What is "Fair Price"?
"Marked price", also known as "fair price".
As a high-leverage and high-risk product, the exchange needs a perfect risk control system to protect the interests of users as much as possible. "Marked price" is one of the effective risk control systems in the BW risk control system.
1. In contract trading, we will come into contact with three kinds of prices.
They are: "Latest Transaction Price", "Index Price" and "Fair Price".
Take "BTC_USDT Perpetual Contract" of BW Exchange as an example,
The three kinds of prices are as follows:
The "7113.0120" in the middle is the "Latest Transaction Price" of the contract trading, which is the latest transaction price after being matched by the buyer and the seller.
The price "7113.50597" on the left below is "index price"; the price "7119.70698" on the right below is "Fair Price".
When you hover over “Index Price” and “Fair Price”, two price explanations are displayed on the right.
2. What is "Index Price"?
"Index Price" is the sum of the weighted prices of contract order's _ spot goods on several spot exchanges.
For example: suppose that the BTC_USDT prices of the three exchanges are 9000, 9004, 8999 respectively, then the calculated index prices would be: 9000 * 30% + 9004 * 30% + 8999 * 40% = 9000.8
The involved exchanges of Index Price may change by the unexpected instability of the exchange.
If an exchange ceases to serve and does not issue any transactions for more than 15 minutes, BW automatically removes the exchange from the index until its trade resumes
3. What is"Fair Price"?
Take BTC_USDT perpetual contract as an example:
Marked Price = Index Price * (1 + Capital Cost Base Difference Rate)
Capital Cost Base Difference Rate =Capital Cost Rate * (Time to next Payment of Capital Cost / Time Interval of Capital Cost)
The fair price indicates the fairest price of the current commodity in the market, and the sustainable contract trading uses the fair price as the marked price, so the fair price determines whether the position will liquidate or not.
The fair price is a reasonable price index calculated on the basis of index price (overall market) and capital rate. Theoretically, it is closer to the "overall market" than the local market price. The biggest advantage of using fair prices as marker price management is that when the local market encounters an extreme market, it can avoid the unexpected liquidation caused by deep breakdown.
4. Why use "Fair Price"?
BW uses "fair price" to calculate the unrealised earnings and losses of contract positions and to make a judgment of forced liquidation.
The use of "fair price" can avoid to the greatest extent that some people maliciously manipulate the real-time market of the contract for a short period of time, which leads to unnecessarily forced liquidation to users.
5. Use of "Fair Price"
BW uses " "Fair Price" " to calculate the unrealised earnings and losses of contract positions and to make a judgment of forced liquidation.
It means that after the execution of contract entrusted order, positive or negative unrealised earnings and losses may be immediately seen in "unrealised earnings and losses" of the position. The reason for this situation is that the current "Latest Contract Transaction Price" and "Marked Price" are different.
It should be noted that: the closing earnings and losses are determined by the closing transaction price. Therefore, there will be differences between the unrealised earnings and losses of the position and the real earnings and losses of the position after closing.
6. Summary of Effective Risk Control System of "Fair Price".
Today, we introduce "Fair Price" as one of the risk control systems in contract trading.
1). "Fair Price" can effectively avoid the short-term manipulation of prices, resulting in unnecessarily forced liquidation to users.
2). "Fair Price" is used to calculate "unrealised earnings and losses"; and "real liquidation earnings and losses" is calculated by "real liquidation price".