For arbitrage traders, beyond the no-arbitrage interval, it means that there are arbitrage opportunities, while within the no-arbitrage interval, it means that futures are priced reasonably and there are no arbitrage opportunities.
After investigating the specific characteristics of the no-arbitrage interval, that is, considering the related cost factors, it is found that the related cost is actually related to the investment subject, trading strategy and even trading time, making the no-arbitrage interval actually a dynamically determined interval.
Different investors have different trading commissions, so different investors must face different no-arbitrage intervals. Institutional investors, especially brokers, have inherent advantages because of their low commission. In actual transactions, the impact cost, as the main part of variable cost, undoubtedly has a great influence on the no-arbitrage interval. The impact cost is not only related to the trend of the spot market, but also related to the implementation strategy of spot arbitrage. To a large extent, it can even be said that the arbitrage trading strategy has a decisive impact on the impact cost.
Affected by the cost of capital, the arbitrage-free interval is still a time-related function; That is, the closer to the contract delivery date, the smaller the capital cost to be considered, and the no-arbitrage interval will be narrowed accordingly.
On the one hand, the reasonable price of stock index futures at a certain point in time can be formed by investors' expectations of the future target index level; On the other hand, when the stock index futures contract expires, the price will converge to the spot index level at that time, so the price of the stock index futures contract can also be determined by the spot price level at that time and the holding cost during the duration of the futures contract.
Adding various cost factors to a reasonable price will form an arbitrage-free range, in which arbitrage trading will not only not get profits, but will lead to losses. Above this range, there will be positive arbitrage opportunities, below this range, there will be negative arbitrage opportunities.
Specifically, the reasonable pricing of stock index futures contracts or the determination of arbitrage boundaries is the premise for the smooth progress of spot arbitrage. That is, when the futures price is higher than its reasonable price range, investors can short futures in the futures market and buy spot in the spot market at the same time, and do the opposite when the futures contract expires to earn the difference. When the futures price is lower than the reasonable price range, investors can buy futures in the futures market and sell the spot in the spot market at the same time, and reverse liquidation at maturity can also earn the difference.
No-arbitrage interval can be obtained by measuring related costs, mainly including transaction costs and capital costs. Transaction costs mainly include fixed costs and variable costs. Fixed costs, that is, direct transaction costs that must be paid when trading in futures and spot markets, mainly include supervision fees, stamp duty, handling fees and trading commissions. Variable costs depend on the scale of futures and spot transactions and the cost of market fluctuations, including impact costs.