Arbitrage trading has become the main trading means in the international financial market. Because of its stable returns and relatively small risks, most large funds in the world mainly participate in the futures or options market by arbitrage or partial arbitrage. With the standardized development of China's futures market and the diversification of listed products, the market contains a lot of arbitrage opportunities, and arbitrage trading has become an effective means for some large institutions to participate in the futures market.
Arbitrage, also known as hedging profit, refers to foreign exchange transactions in which funds are transferred from countries or regions with lower interest rates to countries or regions with higher interest rates to make investments in order to obtain spread income. Refers to buying and selling two different futures contracts at the same time.
In arbitrage trading, investors are concerned about the mutual price relationship between contracts, not the absolute price level. Investors buy contracts they think are undervalued by the market and sell contracts they think are overvalued by the market. If the price change direction is consistent with the original forecast; That is, the price of the buying contract is higher and the price of the selling contract is lower, so investors can benefit from the change of the relationship between the two contract prices. On the contrary, investors will lose money.
The English-Chinese Dictionary of Securities Investment by the Commercial Press explains: arbitrage trading hedging; ; Hedging. Also called: hedging transaction. Name. Trading measures taken to avoid investment losses of financial products. The most basic way is to buy spot and sell futures or sell spot and buy futures, which is widely used in the fields of stocks, foreign exchange and futures. The original intention of hedging or arbitrage trading is to reduce the risk of market fluctuation to investment varieties and lock in the existing investment results, but many professional investment managers and companies use it for speculative profits. Simply hedging speculation is very risky.
Arbitrage trading has the following characteristics compared with ordinary speculative trading:
1, low risk. The spread of different futures contracts is far less severe than the absolute price level, which correspondingly reduces the risk, especially avoids the risk of unexpected events hitting the disk.
2. Facilitate the entry and exit of large funds. Arbitrage can attract a lot of money. Due to bilateral positions, it is difficult for the main institutions to force arbitrage traders to reduce their positions.
3. Long-term stable interest rates. The profit of arbitrage trading is not as ups and downs as unilateral speculation, and arbitrage trading is operated by using the unreasonable price difference relationship in the market. In most cases, the unreasonable spread will soon return to normal, so the success rate of arbitrage trading is very high.
The main arbitrage methods are intertemporal arbitrage, cross-commodity arbitrage and cross-market arbitrage.
1, intertemporal arbitrage: it is an arbitrage model that buys and sells futures contracts of the same commodity with different maturities in the same market, and uses the price difference of contracts with different maturities to make profits. What we offer you this time is the arbitrage of soybean and natural rubber varieties.
2. Cross-variety arbitrage: it is to hedge profits by using price changes between two different but interrelated commodities. That is, buy a commodity futures contract in a certain month and sell another interrelated commodity futures contract in a similar delivery month. Mainly (1): arbitrage between related commodities (this time, it provides arbitrage between copper and aluminum). Arbitrage between raw materials and finished products (such as arbitrage between soybeans and soybean meal)
3. Cross-market arbitrage: that is, buying (selling) a commodity futures contract in one futures market and selling (buying) the same contract in another market to hedge the profit-taking at favorable opportunities. This time we offer the most mature arbitrage between Shanghai Copper and London Copper, and the arbitrage between Dalian Soybean and CBOT Soybean.
Arbitrage trading is divided into physical arbitrage and virtual arbitrage according to whether or not to hand over the physical object. Arbitrage generally tries not to take a firm offer, and makes a profit by changing the price difference of different contracts. With the rich experience of actual trading and the intervention of large funds, many enterprises began to combine futures and spot, further develop hedging theory, and raise the goal of hedging to value-added with a more positive attitude. This kind of corporate arbitrage has attracted more and more attention from investors.
The Role of Arbitrage in Futures Market
Arbitrage plays two roles in the futures market:
First, arbitrage provides investors with hedging opportunities;
Secondly, it helps to restore distorted market prices to normal levels.
Analysis of advantages and disadvantages of arbitrage trading
The risk of arbitrage trading is small and the income is stable. For large funds, if it involves unilateral heavy positions, it will face the shortcomings of high position cost and high risk. On the contrary, if a unilateral light warehouse is involved, although the risk may be reduced, its opportunity cost and time cost are also higher. Therefore, on the whole, it is difficult to obtain relatively stable and ideal returns if large funds are unilaterally heavy or unilaterally light. However, if large funds intervene in the futures market with long and short positions, that is, carry out arbitrage trading, which can not only avoid the risks faced by unilateral positions, but also obtain relatively stable returns.
Advantages of arbitrage trading
1, with low volatility. Arbitrage trades profit from the spread of different contracts, and a significant advantage of the spread is that it usually has low volatility, so arbitrageurs face less risk. Generally speaking, the fluctuation of the spread is much smaller than that of the futures price. For example, the daily price of copper traded in Shanghai Futures Exchange is generally 400-700 yuan/ton, but the price difference between adjacent delivery months is about 80- 100 yuan/ton. Many commodity prices fluctuate greatly and need to be monitored every day. The intraday fluctuation of the price difference is often very small, and it only needs to be monitored several times a day or even less. If the funds in the account fluctuate greatly, speculators must deposit more funds to prevent possible losses. Using arbitrage trading, there are few such concerns.
2. The risk is limited. Arbitrage is the only futures trading method with limited risk. Because of the existence of arbitrage and the competitive choice between arbitrageurs, the price deviation between futures contracts will be corrected. Considering the transaction cost of arbitrage, the spread between futures contracts will remain within a reasonable range, so it is rare for the spread to exceed this range. This means that you can set arbitrage positions in historical high or low areas according to the historical statistics of spreads, and at the same time you can estimate the risk level you have to bear.
3. The risk is lower. Because of its hedging nature, arbitrage trading is usually less risky than unilateral trading. This is an important factor that we need to consider when comparing arbitrage and unilateral trading. Why is the risk lower? Portfolio theory shows that a portfolio consisting of two completely negatively related assets can minimize portfolio risk. Arbitrage is to buy and sell two highly correlated futures contracts at the same time, that is, to build a portfolio consisting of two almost completely negatively correlated assets, and the risk of this portfolio is naturally greatly reduced.
4. Protection against ups and downs. The hedging nature of many arbitrage transactions can provide protection against ups and downs. Because of political events, weather, and government reports, futures prices can go up and down, and sometimes even cause them to go up and down. Prices are blocked on the price limit and cannot be traded. An upside-down unilateral trader will suffer heavy losses before closing his position. This usually leads to a deficit in the trader's account and requires additional margin. In the same environment, arbitrage traders are basically protected. Take intertemporal arbitrage as an example. Because an arbitrage trader is both long and short on the same commodity, his account usually doesn't suffer big losses on the trading day. Although the spread may not follow the direction predicted by traders after the ups and downs stop, the losses caused by it are often much smaller than those caused by unilateral trading.
5. More attractive risk/reward ratio. Compared with a given unilateral position, an arbitrage position can provide a more attractive risk/reward ratio. Although the profit of each arbitrage transaction is not very high, the success rate is very high, which is the advantage of limited risk, lower risk and lower volatility of spread. In the long run, only a few people profit from unilateral trading, and often no more than three people profit from 10. Arbitrage, on the other hand, has the characteristics of stable income and low risk, so it has a more attractive income/risk ratio and is more suitable for the operation of large funds. In the process of fierce competition between long and short sides holding unilateral positions, arbitrageurs can often take the opportunity to intervene and make profits easily.
6. The price difference is easier to predict than the price. Because futures prices fluctuate greatly, it is difficult to predict. In a bull market, futures prices will rise unexpectedly, while in a bear market, futures prices will fall unexpectedly. Arbitrage trading does not directly predict the price changes of future futures contracts, but predicts the price difference caused by future supply and demand changes. The latter prediction is obviously much less difficult than the former one. It is very complicated to determine the relationship between supply and demand that will affect commodity prices in the future. Although there are laws to follow, it still contains many uncertainties. It is unnecessary to consider all the factors that affect the relationship between supply and demand when forecasting the price difference. Because of the correlation between the two futures contracts, many uncertain supply and demand relations will only cause the prices of the two contracts to rise and fall together, and have little effect on the spread, so this supply and demand relationship can be ignored. To predict the price difference between two contracts, we only need to pay attention to the difference of each contract's response to the same change in supply and demand, which determines the direction and extent of the price difference.
Disadvantages of arbitrage trading
Everything has two sides, and arbitrage is no exception. In addition to the above advantages, there are several disadvantages:
1, the potential income is limited. In the eyes of many investors, the biggest disadvantage of arbitrage is the limited potential income. This is normal. When you limit the risk in a transaction, you usually limit your potential income. However, whether to choose arbitrage trading in the end depends on many advantages and limited potential benefits of arbitrage.
2. Excellent arbitrage opportunities rarely appear frequently. The number of arbitrage opportunities is closely related to the efficiency of the market. The lower the market efficiency, the more arbitrage opportunities; The higher the market efficiency, the less arbitrage opportunities. As far as the current domestic futures market is concerned, the efficiency is not high, and each futures product has several good arbitrage opportunities every year. However, compared with the unilateral megatrend, there are many arbitrage opportunities every year.
3. Arbitrage also has risks. Although arbitrage has the advantages of limited risk and low risk, it is still risky. This risk comes from: price deviation continues to be wrong. The strong-weak relationship between contracts tends to maintain the trend of "the strong will be strong and the weak will be weak" in the short term. If this price deviation is finally corrected, the arbitrageur will have to suffer temporary losses in this transaction. If investors can bear such losses, they will eventually turn losses into profits, but sometimes investors will not survive the loss period. Moreover, if the short contract is run until the contract is delivered and the price deviation is not corrected, the arbitrage transaction will end in failure.
Risk Source Assessment of Arbitrage Investment
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:
(a) The spread is developing 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 we make 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 the price difference and strictly enforce it. Since the price difference risk is so important, in practice, it will generally be given 80% risk weight.
(2) delivery risk. It mainly refers to the risk of whether warehouse receipts can be generated in current 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 this risk a weight of 10%.
(3) Risks in 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.
Why choose arbitrage trading?
Arbitrage trading is an investment trading channel independent of unilateral trading, because its corresponding trading object and trading strategy are different from unilateral trading in price, and there is no absolute advantage or disadvantage between them. The choice of the two depends largely on investors' risk preference, investment risk and capital scale.
In general, the spread between contracts involved in arbitrage trading is much smaller than the price change of a single contract, which is a trading method with low risk and stable income. Therefore, arbitrage trading is mainly the investment choice of traders with large amount of funds or stable style. Below we will explain the overall advantages or characteristics of arbitrage trading.
Hedging the uncertainty of related commodities
(1) Reduce volatility and risk.
Compared with a single commodity, arbitrage trading offsets some uncertain factors that affect price changes. Therefore, generally speaking, the fluctuation of price difference is much smaller than that of price, and the risk faced by arbitrageurs is smaller, which also reduces the pressure on investors' fund management.
(2) finite risk
For those arbitrage with corresponding spot operation mechanism, the risk can be limited, or even theoretically there is no risk. For example, if the recent contract price of a storable commodity is lower than the forward contract price and the price difference is higher than the holding cost of the commodity, you can arbitrage, buy the recent contract and sell the forward contract. Even if the delivery is approaching, the spread between the forward contract and the recent contract will widen. Arbitrators can choose to buy for delivery in the near future and sell for delivery in the long term. Therefore, this arbitrage is finite risk arbitrage. This is also known as "spot arbitrage".
(3) protect the daily limit board.
The hedging characteristics of many arbitrage transactions not only hedge the daytime price fluctuations, but also protect the price limit. For example, because of political events, major accidents, weather, government reports and other emergencies, futures prices will rise and fall, and even rise and fall. At this time, the positions that have been written off will suffer heavy losses before liquidation, and even lead to a deficit in the trader's account. Under the same conditions, arbitrage traders are basically protected, and the losses caused are often much smaller than those caused by unilateral transactions.
(4) The risk/return ratio is more attractive.
Compared with a given unilateral position, an arbitrage position can provide a more attractive income/risk ratio. Although the profit of each arbitrage transaction is not very high, the success rate is very high, which is determined by the characteristics of finite risk, low risk and low volatility of the spread. In the long run, there are very few people who make profits from unilateral trading, and often only three out of 10 people make profits. Arbitrage, on the other hand, has the characteristics of stable income and low risk, so it has a more attractive income/risk ratio and is more suitable for the operation of large funds.
Arbitrage is a trading strategy independent of speculation.
Objectively speaking, there are no absolute advantages and disadvantages between investment methods, and the choice of investment methods depends largely on investors' risk preference, investment risk and capital scale. Arbitrage trading is a trading method with less risk and stable income compared with unilateral trading. Its corresponding trading object and trading strategy are different from unilateral price trading, so it is an alternative investment trading method different from unilateral trading.
Under normal circumstances, the contract spread involved in arbitrage trading is much smaller than that of a single contract, and there are more profit opportunities. At the same time, arbitrage is a two-legged walk, so arbitrage trading is often the main investment choice for traders with large capital or stable style. In fact, based on the characteristics of stable arbitrage income and more investment, funds are a good way to carry out arbitrage transactions and obtain arbitrage profits.