Cracking spread refers to the spread between refined oil and crude oil.

Influence of cracking price difference: A refinery, like other manufacturers, is between raw materials and finished products. The prices of crude oil and various refined oil products are often affected by the supply and demand of their products, production conditions and weather. In this way, refineries will encounter great risks in the market with non-integer fluctuations, such as the rise of crude oil prices and the constant or even decline of refined oil prices for a certain period of time. This situation will narrow the cracking spread-the refinery will make a profit by buying crude oil for processing and selling refined oil on the market. Because refineries are in two aspects of the oil market at the same time, the risks they face in this market sometimes even exceed those of retailers who sell crude oil or buy refined oil separately.

(1) Crack the spread transaction

Market participants use crude oil, heating oil and gasoline futures to trade this cracking price difference (also known as oil premium) in the New York Mercantile Exchange. In recent years, due to the drastic changes in oil prices caused by weather and politics, the trading of cracking spreads has become increasingly extensive. The low crude oil price of 1998~ 1999 makes the refinery generate rich cracking income, but in many cases, the change of crude oil price also greatly reduces the cracking income of the refinery.

(B) Singapore fuel oil market cracking spread

In addition to cracking spread trading in the New York Mercantile Exchange, Singapore fuel oil market has also started to calculate and use cracking spread. Among them, most of them are based on the price difference between Singapore fuel oil and Dubai crude oil. When the price difference between fuel oil and Dubai crude oil increases, it means that importers and refiners will gain more profits from the sale or production of fuel oil, or it means that there is a large room for growth in the crude oil market. On the other hand, if it is narrowed, it means that fuel oil is stagnant or crude oil is skyrocketing, fuel oil profits will be narrowed, and the room for crude oil to rise in the later stage will be reduced. Singapore fuel oil market generally adopts the price comparison method of Singapore fuel oil paper goods and Dubai crude oil futures. At the same time, there are a series of price differences in Singapore's open market, such as monthly price difference, quarterly price difference and viscosity price difference, to help traders operate.

(3) the New York Mercantile Exchange cracked the trading order.

The New York Mercantile Exchange provided a fast spread order: an order to buy and sell crude oil and refined oil contracts at the same time. The directive allows refiners to buy and sell crude oil and refined oil contracts at the same time in a certain proportion to lock in refining profits or arbitrage. The New York Mercantile Exchange trades both crude oil and various major refined oil futures contracts, so traders can avoid the risk caused by the change of cracking price difference by designing positions of crude oil and refined oil.

Generally speaking, the output of gasoline is close to twice that of distillate oil. Distillate oil is often used to produce heating oil and diesel oil, and their chemical composition is basically the same. This output structure has prompted many traders to use the allocation method of 3∶2∶ 1 to hedge their risks-three crude oil contracts to two gasoline contracts and one heating oil contract. Refineries with slightly lower gasoline output can use a combination of 5∶3∶2 to hedge risks.

(4) unit of measurement of cracking price difference

Cracking price difference (theoretical refining income) is also measured in USD/barrel. In order to calculate this variable, we must first calculate the joint value of gasoline and diesel, and then compare it with the price of crude oil. Because the price of crude oil is expressed in USD/barrel and the price of refined oil is expressed in cents/gallon, the prices of heating oil and gasoline should be converted into USD/barrel according to the ratio of 42 gallons/barrel. If the combined price is higher than the crude oil price, the overall refining income is positive; Conversely, if the price of * * * is lower than the price of crude oil, the cracking yield is negative.

situation

Hedging refining income by cracking price difference

If a refinery thinks that the price of crude oil will remain stable or rise slightly in the future, but the price of refined oil may fall, it can sell the cracking spread in the futures market, that is, buy the crude oil contract and sell the gasoline and heating oil contracts at the same time.

Once a refiner holds such a short position of cracking spread, it is not necessary to worry about the absolute price change of each contract, but should pay attention to the relationship between the combined price of refined oil and the price change of crude oil. The following example shows how refineries lock in the cracking price difference between crude oil and heating oil.

Lock in refining profit by using 3∶2∶ 1 cracking price difference: 1 A refiner considered his crude oil refining strategy and refined oil profit in the spring of that year. He plans to set up a two-month crude oil-distillate cracking spread hedge to lock in his refining income. At that time, he thought that the cracking difference between crude oil (18 USD/barrel) in April and heating oil (49.25 cents/gallon or 20.69 USD/barrel) and gasoline (53.2 cents1gallon or 22.35 USD/barrel) in May was 2.69 USD/barrel, as an ideal profit.

In March, he bought crude oil processing products in the spot market at the price of 19 USD/barrel, and sold his existing gasoline and heating oil stocks in the spot market. The price of gasoline is 54.29 cents/gallon ($22.80/barrel), and the price of heating oil is 49.5 cents/gallon ($20.79/barrel). His net income is $3.65433.

Because the futures market price reflects the spot price, the crude oil futures price is also 19 USD/barrel, which is higher than the price when he bought it 1 USD/barrel. The price of gasoline rose to 54.29 cents per gallon, and the price of heating oil also rose to 49.50 cents per gallon.

The refiner closed his position in the futures market. Buy gasoline and heating oil at the price of 54.29 cents/gallon and 49.50 cents/gallon respectively, and sell crude oil at the price of 19 USD/barrel. The income from selling the cracking spread position is 67 cents/gallon. If the refiner does not hedge, his income is limited to $3.65438 +03/ barrel. In fact, his income is $3.65438+03+0.67 = $3.80/barrel, which is exactly the same as his original idea. See table 8-5 for operation.

What are the risks of arbitrage trading?

Successful investment comes from understanding and grasping risks. Like other investments, futures arbitrage investment also has certain risks, and analyzing and evaluating its risk sources is helpful for correct decision-making and investment. Specifically, arbitrage investment may have the following risks:

First of all, the spread runs in an unfavorable direction. Except spot arbitrage, other arbitrage methods all profit from the change of spread, so the running direction of spread directly determines the profit and loss of arbitrage. When making an arbitrage investment plan, we should fully consider the possibility that the spread will run in an unfavorable direction. If the loss caused by the unfavorable spread of an arbitrage opportunity is 200 points and the profit caused by the favorable spread is 400 points, then such an arbitrage opportunity should be grasped. At the same time, it is also necessary to set a stop loss for the possible unfavorable operation of price difference and strictly enforce it. Since the price difference risk is so important, it will generally be given 80% risk weight in actual operation.

Second, delivery risk. Mainly refers to the risk of whether warehouse receipts can be generated in spot arbitrage and the risk that warehouse receipts may be cancelled and reinspected in intertemporal arbitrage. Because the above situation has been carefully considered and calculated when making the arbitrage plan, we give the risk weight of 10%.

Third, the risk of extreme markets. It mainly refers to the risk that the exchange may force liquidation when extreme market conditions occur. With the increasingly standardized futures market, this risk has become smaller and smaller, and it can be avoided by applying for hedging and other methods. Therefore, the weight of 10% is also given.

According to the arbitrage forms in the market, it can be divided into four arbitrage forms: intertemporal arbitrage, spot arbitrage, cross-variety arbitrage and cross-market arbitrage. Different arbitrage forms contain different risks, and the corresponding risks are revealed below.

Intertemporal arbitrage

Intertemporal arbitrage is one of the most common arbitrage transactions, which refers to hedging and making profits by using the abnormal change of price difference between different delivery months of the same commodity. Intertemporal arbitrage can be divided into buying arbitrage and selling arbitrage according to the different buying and selling directions of the higher-priced party in different contract months. According to the different buying and selling directions of arbitrageurs in different contract months, intertemporal arbitrage can be divided into bull spread (near buying and far selling), bear market arbitrage (near selling and far buying) and butterfly arbitrage (near buying and far selling and mid-month selling or near selling and far selling). The main risks of intertemporal arbitrage are as follows:

1. Trading risk caused by unilateral market

According to the statistics of historical data, arbitrage opportunities can be profitable in most cases. However, when there is a unilateral market, the previous historical data will lose its reference value, and arbitrage is also very risky. For example, referring to the valid historical transaction data before 20 10, 10 and 19, the average contract price difference of white sugar SR 1 105+009 is 153.2 points, with a maximum of 364 points. On the 20th 10,10 and 19, the price difference between the contract of Sr109 and the contract of SR 1 105 was reduced to 50 points. According to historical statistics, the price difference at that time was the lowest in history, which was a good time to enter the market. However, since then, the sugar futures price has continuously hit a new high, and the spread has not widened as expected, but has continued to shrink, hitting a new low all the way to1October 27 18 in the same year. Since then, although the spread has returned to the average value of 150, it is probably beyond the tolerance of investors who pursue stable returns and heavy positions. Here, investors have to bear the risk of buying recent contracts at high prices. Therefore, unilateral market quotation is the main risk of intertemporal arbitrage.

2. When there is a buying arbitrage opportunity in the market, after investors enter the market, if the spread narrows, they can realize two-way hedging and liquidation.

When there is a buying arbitrage opportunity in the market, if the spread narrows after investors enter the market, they can achieve two-way hedging and profit out. However, if the spread between the two companies continues to expand and arbitrage operations have to be completed through delivery, there will be corresponding risks. After the investor completes the delivery in recent months and gets the spot, he sells the far-month contract through the delivery spot, which involves the interest on the funds occupied by the trading margin, the interest on the delivery payment, the transaction costs, the storage costs and losses, the delivery costs and the value-added tax, among which the value-added tax is the biggest uncertain factor. If it continues to rise sharply in the distant month, the expenditure of value-added tax is likely to continue to increase, devouring the expected profit that was not much, and may even lead to arbitrage losses.

3. Pay attention to the cyclical consistency risk of selling arbitrage

Whether the arbitrage contract is in the same production and consumption cycle has a great influence on whether the arbitrage can realize the expected return, which is especially obvious in the intertemporal arbitrage of agricultural products. Because agricultural products have a certain growth and consumption cycle, there is a strong correlation between them in the same growth and consumption cycle because of the little difference in the influence of weather, climate and other factors. However, for varieties with different growth and consumption cycles, selling arbitrage, such as selling beans A 1009 and buying beans A11,seems to be not far apart, but it is not far apart. Douyi A 1009 is the old soybean of 2009/20 10, and Douyi A101is 2010/kloc-0. Once the physical delivery is involved, it will expand the selling arbitrage.

(2) Spot arbitrage

Spot arbitrage refers to taking advantage of the abnormal change of the price difference between the futures price and the spot price of the same commodity to make a profit through hedging. Broadly speaking, spot arbitrage is an extension of intertemporal arbitrage, and the difference lies in the use of spot for delivery. Like intertemporal arbitrage, spot arbitrage can also be divided into buying arbitrage and selling arbitrage. The main risks of spot arbitrage are as follows:

1. Trading risk caused by unilateral market

Consistent with the situation in intertemporal arbitrage trading, the spot spread calculated according to historical statistical data will also be affected by the unilateral price of the market, resulting in losses, which will not be repeated here.

2. Spot delivery risk

The delivery commodities specified in futures must meet certain delivery standards. When investors arbitrage by selling spot and buying futures, the spot they sell must meet the delivery standards of the exchange before they can be registered as warehouse receipts, otherwise they can't enter the warehouse designated by the exchange and become delivery commodities for delivery, so there are corresponding delivery risks in investor arbitrage.

3. Spot liquidity risk

Take spot arbitrage of stock index futures as an example. In China, due to the difference between the futures market and the stock (or fund) market, short selling is allowed in the futures market, margin trading is implemented, which has leverage effect, and T+0 system and daily debt-free settlement system are also implemented. However, the stock (or fund) market cannot be short-sold, and investors can only adopt the strategy of buying stocks (or funds) and selling stock index futures contracts in spot. The stock (or fund) market is not a margin trading, so there is no need to add margin, while the futures market is a margin trading, so it is necessary to add margin. The stock index futures market is a trading model of T+0, while the stock market is a trading model of T+ 1, so it is impossible to sell stocks (or funds) on the day of purchase, which leads to the inability to open and close positions at the same time. In addition, when the arbitrage spot market is established to buy and sell stocks (or funds), it will cause great impact cost to the spot market. It is the above differences that make spot arbitrage different from intertemporal arbitrage with better liquidity, which makes investors face spot liquidity risk.

(3) Cross-variety arbitrage

Cross-variety arbitrage refers to making use of the abnormal change of the spread/ratio of two related different commodities in the same delivery month to make profits through hedging transactions. These two commodities can be substituted for each other or restricted by the same supply and demand factors. For example, arbitrage transactions can be carried out between metals, agricultural products, metals and energy varieties. The main risks of cross-species arbitrage are as follows:

1. Trading risk caused by unilateral market

This is consistent with the situation in intertemporal arbitrage, and cross-species arbitrage based on historical statistics will also suffer losses due to the influence of unilateral market. For example, referring to the valid historical transaction data before September 17, 2065438, the average ratio of cotton contract CF 1005 and PTA contract PTA 1005 is 1.92, with the maximum value of 2.48 and the minimum value of 1.43. On September 20 17 10, the closing price ratio of cotton cf1kloc-0/05 and PTA1kloc-0/05 reached 2.52. According to historical statistics, the price difference at that time was already the largest in history, which was a good opportunity to enter the market. However, since then, with the start of the cotton bull market, the ratio has climbed to an incredible 3.22, and it is difficult for even large institutional investors to bear such a large unilateral market risk.

2. Variety difference risk

Different exchanges and different commodities have different price limits, and the margin ratio will be different. For example, rapeseed oil from Zhengshang Institute and soybean oil from Dashang Institute carry out cross-species arbitrage. Before the end of 20 10, the price limit of the former was 5% and that of the latter was 4%. Under extreme market conditions, the difference of price limit will bring great risks to cross-species arbitrage. In addition, taking the cross-variety arbitrage of domestic soybean I and soybean meal as an example, soybean I is a domestic soybean (non-transgenic), while most of the soybeans used in the actual squeezing process are imported soybeans (transgenic), and most of the soybean meal produced is also transgenic soybean meal, which determines that the cross-variety arbitrage relationship of beans is not a strict squeezing relationship and will also bring risks to cross-variety arbitrage.

Cross-market arbitrage

Cross-market arbitrage refers to the use of unreasonable price difference or proportion between the same futures commodity contracts traded in two or more exchanges to hedge and make profits. For example, both the London Metal Exchange and the Shanghai Futures Exchange trade cathode copper futures, and the price difference between the two markets will exceed the normal range several times a year, which provides traders with opportunities for cross-market arbitrage. The main risks of cross-market arbitrage are as follows:

1. Standard contract difference risk

This is mainly reflected in the inconsistency of the price limit and the delivery rules of exchange varieties. In terms of price limit, take copper as an example. Domestic Shanghai Copper's price limit is 6%, while Shanghai Copper's price limit is unlimited. When Shanghai Copper has a price limit of more than 6%, the arbitrage between the two will face greater risks. There are differences in delivery rules between Luntong and Shanghai Copper. Since May last year, the Shanghai Stock Exchange has cancelled the provision that cathode copper and electrolytic aluminum brands registered on the London Metal Exchange can be delivered as substitutes without registering with the brands applied for in the previous period. The difference in delivery between Shanghai Copper and Shanghai Copper also increases the arbitrage risk between them.

2. Transaction time difference risk

Obviously, the trading time difference in different markets cannot completely synchronize arbitrage positions and arbitrage hedging. For example, there is such a time difference between the domestic metal market and the London Metal Exchange. In the case of drastic market fluctuations, because a certain market closes its position, it is impossible to open a position or it is too late to hedge the risks brought about by market fluctuations, which is enough to make the arbitrage operation fall short.

3. Additional margin risk

Arbitrage between the two markets, it is inevitable that one position will make a profit and the other position will lose money. Because they are not in the same market, the profit part of arbitrage can't offset the loss part immediately, which leads to the imbalance of books. According to the trading rules, if the losing party fails to add the margin in time, there is a risk of forced liquidation or lightening. In extreme cases, the losing party will have the risk of short positions. Obviously, the passive evolution of this arbitrage into one-way speculation will bring great risks.

4. Risk of foreign exchange fluctuation

The risk of foreign exchange fluctuation mainly comes from whether exchange rate fluctuation is beneficial to the current arbitrage portfolio. Exchange rate fluctuations sometimes make the losers lose more because of exchange rate factors, while the profits shrink because of currency depreciation. For example, arbitrage trading in London is profitable, but it is a loss at home. Under the current situation of the depreciation of the US dollar and the appreciation of the RMB, the profits denominated in the US dollar in London will be reduced, while the losses denominated in the RMB will be enlarged, which will eventually lead to the loss of the whole arbitrage.

5. The risk of logistics cost changes

The change of logistics cost will also affect the price of metal spot trade at home and abroad. Generally speaking, if the metal trade can be profitable, then the corresponding cross-market arbitrage opportunities also exist, so the logistics cost closely related to the metal import and export trade is also an important factor affecting cross-market arbitrage.

Above, we deeply analyzed the main risks contained in the four forms of arbitrage, and summarized the following conclusions.

(1) Arbitrage also has risks. Arbitrage is not "risk-free", but its risk is limited compared with unilateral speculation, so it is necessary to set a corresponding stop loss when arbitrage trading.

(2) Arbitrage is suitable for volatile markets. In the case of extreme market or unilateral market, the risk of arbitrage is great and the corresponding rate of return is low.

(3) Different arbitrage forms have different arbitrage risks. From the risk comparison of the above four forms of arbitrage, the risk from small to large is: period arbitrage, current arbitrage, cross-variety arbitrage and cross-market arbitrage.