Brief introduction of arbitrage model
Arbitrage trading modes can be summarized into four types, namely: stock index futures arbitrage, commodity futures arbitrage, statistics and option arbitrage.
Arbitrage of stock index futures: Arbitrage of stock index futures refers to the behavior of taking advantage of the unreasonable price in the stock index futures market, participating in the trading of stock index futures and stock spot market at the same time, or trading stock index contracts with different maturities and different (but similar) categories at the same time to earn the price difference. Stock index futures arbitrage is divided into futures arbitrage, intertemporal arbitrage, cross-market arbitrage and cross-variety arbitrage.
Commodity futures: Similar to the hedging of stock index futures, commodity futures also have arbitrage strategies. When buying or selling a futures contract, it sells or buys another related contract, and at a certain time, both contracts are closed. It is similar to hedging in transaction form, but hedging is to buy (or sell) physical objects in the spot market and sell (or buy) futures contracts in the futures market; Arbitrage only buys and sells contracts in the futures market, and does not involve spot trading. There are four kinds of commodity futures arbitrage: spot arbitrage, intertemporal arbitrage, cross-market arbitrage and cross-variety arbitrage.
Statistics: Unlike risk-free arbitrage, statistical arbitrage is a kind of risk arbitrage by using the historical statistical law of securities prices, and its risk lies in whether this historical statistical law will continue to exist in the future. The main idea of statistical hedging is to find out several pairs of investment varieties (stocks or futures, etc.). ) has the best correlation, and then find out the long-term equilibrium relationship (cointegration relationship) of each pair of investment varieties. When the price difference (residual of cointegration equation) of a pair of varieties deviates to a certain extent, they start to open positions-buying relatively undervalued varieties, shorting relatively overvalued varieties, and taking profits when the price difference returns to equilibrium. The main contents of statistical hedging include stock matching transaction, stock index arbitrage, short-selling hedging and foreign exchange arbitrage transaction.
Option: Also called option, it is a derivative financial instrument based on futures. The essence of option is to price the rights and obligations in the financial field separately, so that the transferee of the right can exercise his right to trade or not to trade within a specified time, and the obligor must perform it. When trading options, the buyer is called the buyer and the seller is called the seller. The buyer is the transferee of the right, and the seller is the obligor who must fulfill the buyer's right. The advantages of options are unlimited income and limited risk loss. Therefore, in many cases, using options instead of futures for short-selling and arbitrage trading will have less risk and higher returns than simply using futures arbitrage.
Arbitrage, defined in finance, is the act of buying and selling the same or substantially the same securities at favorable prices in two different markets. The financial instruments in the portfolio can be the same or different. In market practice, the word "arbitrage" has a different meaning from the definition. In practice, arbitrage means high-risk positions, which may bring losses, but are more likely to bring benefits.
Guaranteed interest arbitrage
Exchange rate changes will also bring risks to arbitrageurs. In order to avoid this risk, arbitrageurs convert low-interest currencies into high-interest currencies at the spot exchange rate, and also convert high-interest currencies into low-interest currencies at the forward exchange rate, which is called carry arbitrage.
Take Britain and America for example. If the interest rate in the United States is lower than that in Britain, Americans are willing to convert dollars into pounds at the spot exchange rate and deposit them in British banks. In this way, the American demand for pounds has increased. The demand for sterling has increased, and the spot exchange rate of sterling should increase if other factors remain unchanged. On the other hand, in order to avoid the risk of exchange rate changes, arbitrageurs all sign contracts to sell forward pounds at the forward exchange rate, which increases the supply of forward pounds. The supply of forward pounds will increase, and the exchange rate of forward pounds will fall when other factors remain unchanged. According to the experience of foreign exchange market, westerners come to the conclusion that the spot exchange rate of currencies in countries with higher interest rates is rising, while the forward exchange rate is falling. According to this law, the direction of capital flow depends not only on the interest rate difference between the two countries, but also on the interest rate difference between the two countries and the forward premium rate or discount rate of the national currency with high interest rate. If the offset spread is CD and the discount rate or premium rate of the pound is F, then CD = IUK-IUS10 F.
If UK interest rate Iuk= 10%, US interest rate Ius=4%, forward pound discount rate F =-3%, CD = 10%-4%-3% = 3%) 0, then capital will flow from the US to the UK. Because arbitrageurs believe that although the forward pound discount reduces their profits, there are still profits to be made. If the discount rate of forward pound f =-8%, other conditions being the same, CD = 10%-4%-8% =-2% (0, then capital will flow from Britain to the United States. Because arbitrageurs think that the discount rate of forward pound is too high, which not only reduces their profits, but also makes their profits negative. The British, on the other hand, are willing to convert pounds into dollars at the spot exchange rate and dollars into pounds at the forward exchange rate, so that capital can flow from Britain to the United States.
Next, give another example to illustrate the actual situation of carry arbitrage. Suppose the principal of the arbitrageur is $65438 +0000, Iuk= 10%, Ius=4%, the spot exchange rate of the pound is $2.8/,and the forward exchange rate of the pound is $2.73/. At the beginning of the year, the arbitrageur converted US dollars into British pounds and deposited them in the British bank: 1000 US dollars 2.8/=357 1 year, and the interest earned was: 357 10%=35.7.
According to the forward exchange rate of the contract signed at that time, it is equivalent to 97 US dollars (35.7 US dollars 2.73/), which is the gross profit of the arbitrageur. After deducting the opportunity cost of arbitrage, the net profit of the arbitrageur is 40 dollars (10004%), that is, 57 dollars (97-40 dollars). This example shows that arbitrageurs buy spot pounds and sell them at a higher forward pound exchange rate to avoid losses caused by a sharp drop in the pound exchange rate. After 1 year, the spot pound exchange rate is $2.4/,and the arbitrageur still sells the pound at $2.73/.
abstract
Arbitrage activities not only make arbitrageurs profit, but also play a role in spontaneously regulating capital flows objectively. The high interest rate in a country means that the capital there is scarce and badly needed. The interest rate in a country is very low. This means that there is enough capital there. Arbitrage activities are motivated by the pursuit of profit, which makes capital flow from rich places to scarce places and makes capital play a more effective role. Through arbitrage activities, capital flows to countries with higher interest rates, where capital increases and interest rates will drop spontaneously; Capital keeps flowing out of countries with low interest rates. If capital decreases, interest rates will increase spontaneously. Arbitrage activities eventually make interest rates in different countries tend to be equal.