Due to the geographical and time-space differences, there are reasonable price differences for the same commodity in different futures exchanges. Price differences usually come from differences in international and domestic economic policies or consumption seasons. Opportunities for arbitrage also come from major market trends and accidental and unexpected events. Generally speaking, the price difference between the two sides is stable in a fixed area, but sometimes there will be short-term anomalies.
Under normal circumstances, as China is a net importer of copper, it is reasonable that the domestic copper price is higher than the international copper price. When the price difference remains relatively stable, according to the "no arbitrage condition", the trade flow between the two sides will not occur. However, when various factors occur, the domestic copper price is much higher than the international copper price, and the internal and external price difference is greater than the various costs of import, because of the profit-seeking nature of capital, there will be import traders who continue to obtain trade profits through a large number of physical imports. Under the adjustment of market supply and demand, the price difference will eventually return to normal level. Cross-market arbitrage is precisely to capture this short-term anomaly, using futures tools to lock the distorted price difference, and when the market returns to normal equilibrium, it will exit by closing the position.
market risk
Market risk refers to the potential loss of investors' positions when the market price fluctuates in the opposite direction to investors' expectations. From the specific form, market risk is generally divided into trend mutation risk, noise trading risk, exchange rate risk and so on.
The first is the risk of sudden changes in trends. In the process of cross-market arbitrage, arbitrageurs will properly grasp the overall trend of price comparison, generally open positions when the price comparison is abnormal, and predict and evaluate that the price comparison will return to normal in a short time. However, due to the influence of fundamentals, the price range moves as a whole, and traders will face certain losses when they close their positions in the expected price range. Affected by the American economic recession, the exchange rate between SHFE and LME rose for a period of time after 2065438+May 2003. When a systemic financial crisis occurs, it will cause a sudden change in trend. Even if the expected loss caused by cross-market arbitrage is lower than that caused by unilateral speculation, the loss is greater than its stop loss.
The second is the risk of noise trading. In the process of cross-market arbitrage, under normal circumstances, the spread is maintained in a reasonable range, and when the spread breaks through the normal range, there will be suitable arbitrage opportunities. However, when various noise trading behaviors such as fund speculation occur, the spread structure cannot be recovered for a long time, and traders may suffer losses.
The third is exchange rate risk. Exchange rate risk is also a major risk in cross-market arbitrage, and the degree of risk is positively related to exchange rate fluctuations. If the exchange rate fluctuates greatly, it will increase the cost of foreign exchange, and the profit in one market obviously cannot offset the loss in another market.
Institutional risk
Institutional risk means that cross-market arbitrage is generally carried out between two different exchanges. If the management systems of the two exchanges are different, it will bring some losses to the arbitrage results. Institutional risks can generally be divided into information asymmetry risk, transaction cost risk, time difference risk, delivery risk, price difference risk, liquidity risk and value-added tax risk.
The first is the risk of information asymmetry. Cross-market arbitrage will involve two different markets, domestic and overseas. Because the information in overseas markets is not in place, there may be information asymmetry, which will bring losses to the transaction. Overseas investment funds are generally also entrusted agents. In this case, it is often easy for counterparties to grasp the core secrets of domestic funds, such as the direction of opening positions, the scale of funds, trading strategies, and anti-risk ability. At the same time, the handling fees at home and abroad are different. Investors can only fully safeguard their legitimate rights and interests if they choose a suitable brokerage firm on the basis of in-depth investigation of scale, reputation and operating ability.
The second is liquidity risk. Liquidity risk refers to the risk that due to the lack of sufficient liquidity in the market, buyers and sellers can't find suitable counterparties in the shortest time, which leads to the failure of futures trading in time. This kind of risk usually occurs when traders enter the market to open and close positions. If traders can't enter the market to open positions at the right price and time, they can't carry out the expected plan, and they can't get the expected number of positions through hedging. When it is on the price limit or on the electronic disk with a small trading volume, or when the futures price continues to show a unilateral trend and is close to the delivery time, the market liquidity will decrease, and it is difficult for traders to close their positions in a short time, thus facing losses.
operating risk
Operational risk mainly refers to the possibility of losses caused by traders' own operational mistakes, such as mistakes in trading links, trading procedures and trading means. Operational risks include delivery risks and fund management risks.
The first is the delivery risk. Delivery risk mainly means that cross-market arbitrage will encounter more details in the process of physical delivery, and if traders do not operate carefully, losses will occur. For traders, if they are not ready for delivery, they can generally deliver the goods directly to the delivery warehouse, otherwise they need to sell the goods in the spot market before they can buy the goods of the delivery brand and implement delivery. If there is a price difference in the middle, it usually needs to be included in the transaction cost.
The second is the risk of fund management. In a single market, cross-market arbitrage positions generally face comprehensive market risks. If the fund management method is unscientific, there may be large price fluctuations in a certain market, which may lead to the exposure of unilateral positions to risks. Under normal circumstances, futures exchanges often implement the debt-free settlement system on the same day, and futures companies settle traders' profits and losses every day according to the settlement provided by the exchange. Therefore, when futures prices fluctuate greatly, traders will face the risk of being forced to close their positions if they cannot make up the margin as required. Therefore, in the process of arbitrage, traders should pay full attention to the capital situation of the two markets to prevent unilateral forced liquidation due to insufficient margin, otherwise losses may occur.
Arbitrage strategy
The market situation faced by the futures market is changing rapidly, and its risk is very complicated and serious. When there is a crisis in the futures market, it will adversely affect the investment income of traders, seriously affect the spot market and cause losses to the whole economic system. Therefore, how to build a more suitable risk prevention system is of positive significance to the futures market. A mature futures market must build a comprehensive, complete and systematic market system in order to comprehensively and effectively guard against futures market risks.
Intertemporal arbitrage
Intertemporal arbitrage of commodity futures refers to an operation mode in which investors establish equal trading positions in different contract months of the same futures product and end trading by hedging or delivery. Intertemporal arbitrage is the most commonly used way for investors in commodity futures arbitrage trading.
The risk of changing the moon
Affected by the expiration of the contract, most of the contracts were closed within 1-3 months. When the contract is converted, the contract of the intertemporal arbitrage portfolio will also be postponed. In the process of postponing, if there is a price difference, there will be a gap in an instant, or the law is different from before. Therefore, it is necessary to reasonably evaluate and measure whether the spread after the move is beneficial to the original arbitrage position.
liquidity risk
According to the current trading volume of Shanghai copper market, when both contracts are based on the active month, liquidity risk is impossible to talk about. However, with the passage of time, when the contract to establish a position gradually turns into a non-main contract, liquidity problems will arise. Therefore, we must pay full attention to the opportunity to move positions.
Risk of forced opening of positions
Although there are few cases of forced liquidation in Shanghai copper market at present, when this happens, it will lead to a substantial increase in contracts in recent months. Judging from the increase, the far-month contract has a limited increase. Therefore, we must strictly guard against some arbitrage combinations that buy far and sell near.
Arbitrage strategy
In the existing market, the risks of futures business far outweigh the benefits. In the process of trading, when the spread changes in an unfavorable direction, if it exceeds a certain range, it is necessary to stop the loss in time to minimize the loss, which will help to control the adverse effects of noise traders to the maximum extent. If the market is in the process of transforming from a reverse market to a positive market, it will face greater losses if the entry point is set in the reverse market. The best way to avoid this situation is to stop loss. Another strategy is position adjustment, which is similar to capital intervention, but its meaning is much richer than the latter. In the process of capital intervention, we must maintain a relatively suitable position scale. At the same time, in order to prevent emergencies, certain funds must be prepared to help reduce the risks brought by emergencies. In the process of position adjustment, it is also important to keep the dynamic change of position scale.
Cross-variety arbitrage
Cross-variety arbitrage of commodity futures refers to a trading method in which investors buy or sell another related commodity (contract) while selling or buying one commodity (contract), and when the price difference between them narrows or expands to a certain extent, they close their positions. In the futures market, the trend of some varieties with strong correlation is usually basically the same, but the price difference or price comparison relationship between them will show certain fluctuations, or the price difference trend has certain timeliness and seasonal characteristics. Cross-variety arbitrage of commodity futures is mainly to grasp the trend of these varieties deviating from the normal situation.
Risk of noise traders
Under the noise trading model, investors are generally divided into two different types: noise traders and rational arbitrageurs. The former deals with noise information unrelated to the base value, while the latter deals with comprehensive fundamental information. In some markets, information is relatively complete, so investors can arbitrage rationally and make profits when futures prices rise or fall, so the expected returns and risks of their arbitrage portfolio are not great. In the case of insufficient information, speculators often create some fictitious demands and gain profits by artificially promoting market fluctuations, that is, the market is dominated and mastered by noise traders. At this time, speculation will be very common, leading to sharp price fluctuations, but arbitrageurs who want to make profits in a short time must bear this risk.
Squeezing risk
Usually short positions are more likely to appear when there is no spot delivery basis. At this time, the bulls will make a profit, the position size will be reduced, and some energy can be released for the bears. When there is confrontation between long and short positions, opponents in the speculative market lack understanding of stop-loss means, which will lead to price ups and downs. In particular, when the fund continues to increase its positions and substantially pushes up the copper price, but it still cannot touch the stop loss of the short position, when it fails to attack and can't get away with it, it will lead to a rapid decline in copper prices.
Other basic risks
This kind of risk mainly includes the systemic risk caused by the change of national policy level. Tariff and value-added tax have a great influence on the cost of importing copper and zinc, and these changes will seriously affect the arbitrage income of investors.
conclusion
The futures market is a high-risk market, and the low risk of arbitrage trading is only relative. In the process of engaging in various arbitrage transactions in commodity futures market, investors cannot be automatically insulated from risks, nor can they ignore the existence of various internal and external risks in investment decision-making and concrete implementation. Only by fully recognizing the existence of risks can we make better use of futures arbitrage tools.