Arbitrage generally refers to the trading behavior that futures market participants use the price difference between different months, different markets and different commodities to buy and sell two different types of futures contracts at the same time to obtain risk profits from them. Traders buy contracts that they think are "cheap" and sell those "high-priced" contracts at the same time, benefiting from the changing relationship between the prices of the two contracts. In arbitrage, traders are concerned about the mutual price relationship between contracts, not the absolute price level.
Arbitrage can generally be divided into three categories: intertemporal arbitrage, cross-market arbitrage and cross-commodity arbitrage.
Give a simple example:
Assume that pork was generally sold in 7 yuan/kg in the market in previous years, and the cost of raising pigs for farmers was 4 yuan.
Because the market is difficult to predict, the supply of pork is affected by many factors. Farmers are afraid of falling pork prices, and canneries are afraid of rising pork prices, which involves the expected problems. Futures can be understood as expected commodities (or commodities)
As a futures arbitrageur, you can do this:
1. Sign a contract with farmers: after three months, buy 1000 Jin of pork from farmers at the price of 6 yuan (pay a small deposit, and then pay the payment after three months).
2. Sign a contract with the cannery: After three months, supply 1000 Jin of pork to the factory at the price of 7 yuan.
The advantage of this is that farmers don't have to worry that the price of meat will fall to the point of losing money, because your contract with them shows that they will earn 2 yuan/Jin. And canneries don't have to worry that rising meat prices will lead to higher costs, because you already have a contract with them.
Well, three months later. ...
If the price of meat rises to 8 yuan, you can still buy 1000 Jin of pork from farmers through the contract and pay 6000 yuan. Then sell 1000 kg of pork to the cannery according to the contract and get 7000 yuan, so you earn 1000 yuan; If the price goes up, the factory can save 1 000 yuan through the contract, while the farmers will not lose even though they earn less (they earn more by selling to the market).
What if the price of meat drops to 5 yuan? Then the price of the pork you bought and sold from them is still the same, or it is equal to the profit 1000 yuan. It's just that farmers can sell 1000 kg of pork at the price of 6 yuan because of your contract here, earning more than the market; Because of your contract, the cannery must buy 1000 kg at a price higher than the market price in 2 yuan, but this 2000 yuan is their risk cost. Because of the contract, you helped them bear the risk of price increase. But this does not mean that they are losing money, because the price of pork has dropped, which is of great benefit to them.
It's much better before you know it. What I said above is intertemporal arbitrage. It is the possible fluctuation of commodity prices in different periods, and you profit from it.
There is also cross-market arbitrage, which uses the differences in commodity prices in different places to arbitrage;
Cross-commodity arbitrage is arbitrage by using the price difference of different commodities.
Leave me a message if you don't understand.
If you think what I said is ok, add a few more points. It's not easy to type so many words, hehe ...