Other arbitrage methods of foreign exchange futures

Like other futures, foreign exchange futures include inter-month arbitrage, inter-market arbitrage and cross-currency arbitrage in addition to spot arbitrage.

(1) Cross-month arbitrage

Cross-month arbitrage refers to traders buying (selling) futures contracts in one month and selling (buying) futures contracts of the same variety on the same exchange in another month in an attempt to profit from the price difference between the two contracts.

From the interest rate parity formula of foreign exchange forward market, it can be seen that the decision of forward interest rate is related to the interest rate and time length of two currencies. Similarly, in foreign exchange futures, the length of time represented by the near and far contracts is different, which will also produce a moderate price difference. But the price difference is actually changing, sometimes expanding and sometimes narrowing. Cross-month arbitrage trading is hoping to profit from this price difference fluctuation.

situation

Cross-month arbitrage

If on March 1 day, the Japanese yen futures price due in September of CME 9 is 7830 points, and the Japanese yen futures price due in February of 65438 is 7920 points, and the spread is 90 points, the arbitrageur expects the spread between the two contracts to become smaller, so he buys the Japanese yen futures contract in September and sells the Japanese yen futures contract in February of 65438. 10 days later, the price of Japanese yen was 8090 points in September and 8060 points in February, and the spread narrowed to 30 points. If arbitrage hedges September and February at the same time, it can make a profit of 60 points (90-30) and the profit amount is 750 dollars (60× 65438).

(2) Cross-market arbitrage

Cross-market arbitrage refers to an arbitrage transaction in which traders buy a foreign exchange futures contract in one exchange and sell the same foreign exchange futures contract in another exchange according to the price difference forecast of the same foreign exchange futures contract in different exchanges, so as to profit from the price difference between the two.

situation

Cross-market arbitrage

Suppose that on a certain trading day, the price of Japanese yen futures due in September of CME 9 is 7740 points, while that of Japanese yen futures due in September of Philadelphia Stock Exchange (PBOT) is 7750 points, and the price difference between them is 10 points. Because the subject matter of the yen futures contracts of the two exchanges is the same, the amount of each lot is 654.38+02.5 million yen, and both of them expire in September, so there should be no difference in prices. At least on the September expiration date, the prices of the two contracts will reach the same level. This spread provides a risk-free arbitrage opportunity. Arbitrators can buy in CME and sell in PBOT at the same time, and the price difference is 10 point. When the spread becomes 2 points, each contract can gain 8 points by closing the position at the same time (the commission cost is ignored).

(3) Cross-currency arbitrage

Cross-currency arbitrage means that traders buy futures contracts in one currency and sell futures contracts in another currency with the same maturity month according to the price trend forecast of futures contracts with different currencies in the same exchange, so as to carry out arbitrage trading.

The contract design of major foreign exchange futures exchanges in the world is to trade major non-US dollar free currencies in US dollars. In this way, the strength or weakness of the dollar itself will lead to the general decline or general rise of non-dollar currencies. If there is a serious economic recession in the United States, which leads to the weak position of the US dollar, correspondingly, currencies such as the euro, the Japanese yen, the British pound and the Australian dollar will generally appreciate against the US dollar. The economic conditions of Japan and European countries are also different, and the government's economic policies are also very different, which makes it impossible for their currencies to maintain the same degree of strength. There are always some currencies that are stronger and others that are weaker. If the euro appreciates strongly against the dollar and the yen appreciates slightly against the dollar, you can buy euro futures and sell yen futures with the same maturity month. If the euro rises more than the yen in the later period, it will be profitable to hedge in the opposite direction. The advantage of cross-currency arbitrage is that even if the general trend is in the wrong direction, such as the dollar is not weak, but in a strong position, the euro and the yen will fall together, but because the euro is still strong relative to the yen, the decline relative to the yen is also light, so the above arbitrage behavior can still make a profit.

B

foreign exchange speculation

Speculation in foreign exchange is to earn the difference by buying low and selling high during the exchange rate fluctuation. Speculation can be carried out in various markets such as spot, forward and futures. When speculators expect the exchange rate of a currency to rise, they buy it in the foreign exchange market. If the exchange rate of the currency really rises, speculators can sell it at the rising exchange rate and get speculative profits. This kind of speculative trading of buying first and selling later is called "long position", which can also be called "short position" in derivatives market. When speculators predict that the exchange rate of a currency will fall, they will sell it in the foreign exchange market. If the currency exchange rate does fall, speculators can buy at the falling exchange rate and earn speculative profits. This speculative transaction of selling before buying is called "short selling", which can also be called "short selling" in derivatives market.

Speculators expect to make money from price fluctuations, but the actual effect is not equal to expectations. The result of speculation may make money or lose money. As we all know, speculating in foreign exchange is actually a high-risk transaction. If the speculative tools used by speculators are spot, the risk is relatively small because there is no leverage. If the speculative instruments used are leveraged foreign exchange derivatives, the risk will be amplified by leverage, and the greater the leverage, the greater the risk. Of course, when speculative trading goes well, speculative profits will also be amplified.

If divided from the attitude towards risk, the risk value orientation of speculators and hedgers is just the opposite. Hedgers need to involve foreign exchange in economic activities, and the objective existence of risks brought by exchange rate fluctuations makes it inevitable. Although this kind of fluctuation may be beneficial sometimes, once there is unfavorable fluctuation, it is entirely possible to disrupt the normal business order of enterprises and even lead to crisis in serious cases. In order to avoid this unfavorable situation, foreign exchange-related enterprises would rather give up their potential income and use foreign exchange derivatives for hedging transactions. Obviously, foreign exchange-related enterprises are typical risk averse. On the other hand, foreign exchange speculators are risk-averse. If the exchange rate market is stable, they will naturally lose their speculative value and speculators will quit. Hedgers transfer the price risk of the spot market through the futures market, and this risk is actually borne by speculators.

Arbitrators in the foreign exchange market are essentially speculators, but they are different from hedging and speculators in the value orientation of risks. They want to make a profit and are unwilling to take excessive risks. They stare at the performance of the same or related varieties in different markets, or at the contract price of the same variety in the same market at different delivery times. Once there is an arbitrage opportunity, they will take it immediately. Although it succeeds every time and occasionally misses, on the whole, because of the low risk, the long-term effect of piling up sand, and the fact that the institution has basically realized automatic computer monitoring and trading, it does not need to consume a lot of energy, and arbitrage trading has always been a trading strategy that institutions like very much.

The foreign exchange market is the most widely distributed in all markets, and the time period covered by foreign exchange derivatives is also very long (CME's euro futures contract covers up to 5 years). The global foreign exchange market can be orderly and there will be no big price deviation, which is closely related to the existence of arbitrageurs. Arbitrators are like all-weather inspectors in the whole market, patrolling between markets all the time, and correcting big deviations immediately. Therefore, it can be said that arbitrage trading has played a positive role in the normal and orderly foreign exchange market.