Cross-market arbitrage is simply a trading strategy of establishing opposite positions in two markets at the same time and closing positions at the same time in the future to obtain profits. For example, buy crude oil futures contracts in Shanghai International Energy Exchange Center and sell new york crude oil or Brent crude oil futures with the same position in the international market.
So how to operate?
Generally speaking, arbitrageurs have two expectations for the spread between two crude oil futures: one is to expect the spread between the two cities to narrow, and the other is to expect the spread between the two cities to expand, thus forming two trading strategies.
Two arbitrage strategies
Expected spread narrowing arbitrage
Suppose that the current Shanghai crude oil futures price is USD 44/barrel (RMB quotation is converted into USD quotation), the new york WTI crude oil futures price is USD 47/barrel, and the difference between the two crude oil futures is USD 3.
If the arbitrageur thinks that the spread between two related futures contracts is too large at present, then he will hope to narrow the spread after arbitrage.
Buy Shanghai crude oil futures and sell new york WTI crude oil at the same time.
If the futures price of Shanghai crude oil rises to USD 46/barrel and the futures price of WTI crude oil in new york rises to USD 48/barrel at some time in the future, the spread will be reduced to USD 2. Trading Shanghai crude oil futures made a profit of USD 2/barrel, while WTI crude oil futures lost 1 USD/barrel, resulting in a total profit of 1 USD/barrel.
Expected spread expansion arbitrage
If the arbitrageur thinks that the spread between two related futures contracts is too small, he will hope that the spread can expand the profit after arbitrage. You can sell Shanghai crude oil futures and buy new york WTI crude oil. If at some point in the future, the Shanghai crude oil futures price rises to USD 46/barrel, and the new york WTI crude oil futures price rises to USD 50/barrel, the spread will widen to USD 4.
If at some point in the future, the Shanghai crude oil futures price rises to USD 46/barrel, and the new york WTI crude oil futures price rises to USD 50/barrel, the spread will widen to USD 4. The trading loss of Shanghai crude oil futures was USD 2/barrel, while WTI crude oil futures rose USD 3/barrel, with a total profit of USD 65,438+0/barrel.
Risk warning
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Although cross-market arbitrage is a relatively stable way of maintaining and investing, there are still some risk factors. The first is exchange rate risk. The two markets are quoted in different currencies. Once the exchange rate fluctuates violently, it fails to lighten or close the position at the same time, which directly affects and changes the result of this arbitrage investment. Secondly, the quality of the two crude oil futures is different, and multiple factors such as supply and demand will affect the price trend, and the investment results may not be as good as investors' expectations.