Spot arbitrage refers to a futures contract. When there is a price difference between the futures market and the spot market, it uses the price difference between the two markets to make a profit by buying low and selling high. Theoretically, the futures price is the future price of commodities, and the spot price is the current price of commodities. According to the same price theory in economics, the difference between them, that is, "basis" (basis = spot price-futures price) should be equal to the holding cost of the commodity. Once the basis significantly deviates from the cost of holding, there will be opportunities for spot arbitrage. Among them, the futures price is higher than the spot price and exceeds all kinds of delivery costs, such as transportation cost, quality inspection cost, storage cost, increased invoicing cost and so on. Spot arbitrage mainly includes forward buying spot arbitrage and reverse buying spot arbitrage.

Implementation steps

1. Calculate the theoretical price of stock index futures and estimate the upper and lower limits of the no-arbitrage interval of stock index futures contracts. The determination of the upper and lower limits of no-arbitrage interval is related to many parameters, such as lending rate, market liquidity, market impact cost, transaction cost and so on. By determining the parameter generation formula, you can get the arbitrage-free interval that suits you. Because the arbitrage opportunity is fleeting, the calculation of the no-arbitrage interval should be completed in time, and the actual operation is often carried out with the help of computer programmed trading.

2. Judge whether there are arbitrage opportunities. By monitoring the futures contract price trend and comparing it with the no-arbitrage interval, we can judge whether there is arbitrage opportunity. Only when the futures price falls below or above the upper limit of the no-arbitrage interval will there be operational arbitrage opportunity.

3. Determine the transaction scale. When determining the transaction scale, we should consider the expected profit level and the impact of the transaction scale on the market impact. If the transaction scale is too large, the impact cost will be high, thus reducing the arbitrage profit. In addition, we should also consider the possibility of margin financing and securities lending, and we can do reverse basis arbitrage.

4. Conduct stock index futures contracts and stock trading at the same time.

5. Monitor the profit and loss of arbitrage position and decide whether to increase or decrease the position.