# Margin trading on Xena Exchange

Margin trading (trading with leverage) is a trading mode when a client can enter into some transaction having only a fraction of the full cost of the asset.

Consider that Alice is anticipating rise of the price of Bitcoin and decides to buy some to sell it at the higher price later. She has \$10'000 on her account and buys 2.5 Bitcoins at the current market price (\$4'000 per 1 BTC). In some time her forecast comes true, and she sells her Bitcoins at \$4'200, getting \$10'500. Her profit equals \$500.

If Alice has traded using the 10x leverage, she could have bought 25 Bitcoins (having the same \$10'000 on here account). After closing the transaction her profit would have been \$5'000 — 10 times more than without the leverage.

Keep in mind that leverage magnifies positive outcomes (profit) as well as negative outcomes (loss) of your transactions. Before trading, please, make sure that you understand all risks related to leveraged trading. If the risks involved seem unclear to you, mind applying to an outside specialist for an independent advice.

There are different ways how leverage can be obtained. For instance, some brokers may provide special loans to their clients that are returned when the related transaction is closed out. Xena Exchange uses special derivative instruments to achieve the same result.

# What are Xena Listed Perpetuals?

Each Xena Listed Perpetual is a contract between a buyer and a seller to exchange the difference in value of a particular instrument between when the contract is opened and when it is closed. Let's consider a XBTUSD Perpetual as an example:

• The value of each contract is how much Bitcoins are worth 1 USDT
• Alice anticipates that the price of Bitcoin will go up and enters into a transaction, buying 100'000 contracts by the current market price, which is, say, \$4'000. So the value of her position as of the opening is 100'000 / 4'000 = 25 Bitcoins
• The initial margin rate for XBTUSD is 5%. To enter the transaction, Alice must have only 25 BTC * 5% = 1.25 BTC on her account. These funds will be locked on her account and returned when she closes the position
• The price goes up and Alice can sell 100'000 contracts at price \$4'200. The value of the position as of closing is 100'000 / 4'200 = 23.81 BTC. The difference of values (1.19 BTC) is the Alice's profit
• If Alice were not successful in her prediction and the price felt to \$3'950, the value of the position would be 100'000 / 3'950 = 25.31 BTC. The difference of the values (-0.31 BTC) is the Alice's loss

## Price formation of Xena Listed Perpetuals

Xena Listed Perpetuals are traded in a dedicated order book, not linked to the order book of the underlying instrument. Each trader’s order is combined in the order book with those from other market participants, including market makers, and becomes an integral part of the price discovery process. Anyone can place into the market a better bid or offer, as is the case in all exchange based markets. No-one is forced to accept the price offered in the market.

Order book displaying limit orders of market participants:

The bottom part of the order book displays bids — orders from clients looking to make a purchase. The top part of the screen displays asks (offers) — orders from clients looking to sell. The volume shows how many lots can be bought or sold at a certain price.

For the prices of Perpetuals stay close to the prices of their underlying assets, special mechanics are involved:

• Positions are marked using the value of the underlying index. For example, the average price of Bitcoin traded on three major exchanges (Bitstamp, CoinBase Pro, and Kraken), that is used as the underlying index for the XBTUSD Perpetual, is now \$3'650. A trader opening long position in XBTUSD at, say, \$3'700, will immediately have unrealised loss of \$50 for each 1 BTC of his position value. Knowing that, he would not accept such high offer and enter into such trade.
• Hourly clearing using the underlying index price. Each hour unrealised profit and loss of all active positions is settled to the traders' accounts.
• Arbitrage: the arbitrage between a Xena Listed Perpetual and the underlying instrument will ensure both markets remain at or close to parity. This arbitrage is based on the opportunity for traders to profit whenever the two markets are out of line. For example, assume that Bitcoin is trading at \$3'650 bid and \$3'652 offered. If the Xena XBTUSDT Listed Perpetual is offered below the bid (e.g. at \$3'640), a trader will profit from buying the Xena XBTUSD Perpetual at the lower price and selling the real Bitcoin at \$3'650.
• Premium payments paid at each hourly clearing. The premium is calculated as the difference between the volume-weighted average bid and offers price of a Perpetual, and the price of the underlying index. If at the clearing time the VWAP of bids and offers of the XBTUSD Perpetual is \$3'700, and the index price is \$3'650, all holders of longs positions will be charged \$50 for each 1 BTC of the position value; and all holders of short positions will be paid the same amount. Knowing that, holders of longs positions will tend to close their long positions by selling the contracts on the market and, hence, pushing the price of the Perpetual down. If the Perpetual is traded below the index, holders of short positions will pay to holders of long positions; thus, they will try to close their short positions by buying on the market, pushing the price of the Perpetual up.
• Note that the difference must exceed a certain threshold for the Premium to be charged and paid
• All trades involving Xena Listed Perpetuals can occur only within the relatively narrow range(Price Range) around the price of the underlying index.

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