Spread refers to the trading method of buying or selling a futures contract, selling or buying another related contract at the same time, and closing both contracts at the same time within a certain period of time. Arbitrage is to establish multiple bilateral positions in opposite directions on different contracts (including spot), which is essentially to speculate on the price difference between contracts with good correlation and strong linkage.
Classification of arbitrage
Arbitrage generally operates by using the price difference between different delivery months, different commodities and different markets, and can be divided into intertemporal arbitrage, cross-product arbitrage and cross-market arbitrage accordingly.
Intertemporal delivery refers to buying and selling futures contracts of the same commodity in different delivery months in the same market, expecting to hedge and close positions at the same time when the price relationship is favorable. For example, buy 65438+ 10 soybean meal futures contract, sell May soybean meal futures contract, sell 65438+ 10 contract, buy May contract, and close your position when the price changes to your advantage. The main operating methods of intertemporal arbitrage are bull spread, bear spread and butterfly spread, which will be introduced respectively in the following contents.
Commodity refers to arbitrage trading by using the price difference between two different related futures contracts in the same market, that is, buying and selling different kinds of futures contracts in the same market at the same time in the same delivery month, and hedging all positions to make profits when the price changes are favorable. For example, there is obvious substitution between soybean oil and palm oil. When the price of soybean oil and palm oil futures contracts in the same market deviates too far from the normal spread, both contracts can be bought and sold at the same time, and after the spread tends to be normal, the positions can be closed for profit.
In addition, there are arbitrage opportunities in the price relationship between raw materials and finished products, such as soybean oil extraction arbitrage and crude oil cracking arbitrage. There is a normal crushing relationship between soybean and its crushed products, namely soybean meal and soybean oil. If the price of soybean futures is low, but the price of soybean meal and soybean oil futures is high, which exceeds the normal relationship between squeezing margin and price comparison, you can buy soybean futures contracts, sell soybean meal futures contracts and soybean oil futures contracts at the same time for soybean oil arbitrage, and wait for an opportunity to close the position at the same time to make profits. On the other hand, if soybean futures prices are high and soybean meal and soybean oil futures prices are low, you can sell soybean futures contracts and buy soybean meal and soybean oil futures contracts at the same time to carry out ReverseCrushSpread oil arbitrage. Crude oil cracking arbitrage is similar to soybean oil extraction arbitrage, and there is a normal price difference relationship between crude oil and its processed products, such as heating oil and light gasoline. You can buy crude oil futures contracts and sell heating oil futures contracts and light gasoline futures contracts for cracking arbitrage, or you can sell crude oil futures contracts and buy heating oil futures contracts and light gasoline futures contracts for reverse crude oil cracking arbitrage under the opposite conditions. Whether to adopt forward or reverse raw material-finished product arbitrage depends on the conversion coefficient GPM called "GrossProcessingMargin".
Total processing income (GPM)= price income of finished products-price cost of raw materials. If GPM > 0, choose positive hedging profit, that is, buy raw material futures and sell finished product futures; If gpm < 0, choose reverse hedging for profit, that is, sell raw material futures and buy finished product futures at the same time.
Cross-market arbitrage refers to buying (selling) a futures contract in a delivery month in one exchange and selling (buying) a similar futures contract in the same delivery month in another exchange, taking advantage of the favorable opportunities generated by the different frequency and amplitude of price fluctuations of the same futures contract in the two markets, and hedging the contract in both exchanges at the same time, thus making profits.
Some people regard the arbitrage behavior of the same commodity between the futures market and the spot market as cross-market arbitrage. Cross-market arbitrage trading should fully consider various factors that affect the spread between the two markets, such as transportation costs, trading delivery rules, grading and discount regulations, geographical particularity of exchanges, market liquidity and differences between supply and demand, and exchange rate risks should also be considered in different countries.
Bull market spread, bear market arbitrage and butterfly arbitrage
Three kinds of arbitrage
It is expected that the market will show the characteristics of bull market in the near future, and the supply is in short supply. In recent months, the futures contract price will rise faster and fall slower than in the distant months. Or the far-month contract price is weak, with a limited increase, but a strong downward trend. You can use the bull spread, that is, buy the near-month contract and sell the far-month contract at the same time, which is recorded as (near-month)/(far-month) arbitrage. For example, the arbitrage of 65438+ 10/May is to buy the 65438+ 10 contract and sell the May contract. In the bull market spread, even if the forecast is wrong, the price trend will fall instead of rising, and the futures price will fall to zero at most in the near future. Therefore, in theory, beef offal is a hedging profit with limited risk.
Bear market arbitrage is just the opposite of bull market spread. It is expected that the market will show the characteristics of bear market in the near future, and the supply exceeds the demand. In recent months, the futures contract price will fall faster and rise slower than in the distant months. Or the far-month contract price is oversold, with limited downside and strong rebound. Bear market arbitrage can be used, that is, buying far-month contracts and selling near-month contracts, which is recorded as (far-month)/(near-month) arbitrage. For example, September/May arbitrage means buying September contracts and selling May contracts.
Butterfly arbitrage can be regarded as a combination of bull spread and bear market arbitrage. It uses the price difference of three different delivery month contracts to hedge profits, which consists of two opposite intertemporal arbitrage and * * * enjoy the delivery month contract. Traders take advantage of the difference between the futures contract price in the middle month and the futures contract price in the delivery months on both sides to make profits, such as buying 5 lots 1 soybean meal contract, selling 10 lots of 5 lots of 5 lots of May soybean meal contract and buying 5 lots of September soybean meal contract.
Butterfly arbitrage is a complementary and balanced combination of two intertemporal arbitrages, which is an arbitrage transaction between multiple contracts of the same futures product in different months. Mid-month futures contracts are the core and link of arbitrage, and the number of contracts is equal to the sum of the contracts of both parties.
Hedging spread and its influence on arbitrage gains and losses
The spread is the difference between the near-month futures contract price and the far-month futures contract price in arbitrage portfolio. Arbitrage spread can be negative (positive market) or positive (negative market), depending on whether the contract price in the recent month is higher or lower than the contract price in the far month.
The change trend of contract price of the same futures product in different delivery months is basically the same, but the hedging spread between contracts is constantly changing. The smaller and more negative the hedging spread is, the weaker the hedging spread is; The bigger the hedging spread, the more positive it is, and the stronger the hedging spread is. The hedging spread is stronger along the number axis (from negative to positive) and weaker in the opposite direction. The absolute value of hedging spread increases, that is, the contract spread between recent month and far month increases, which is called hedging spread increase; On the contrary, the price gap has narrowed, which means that the hedging spread has widened. In short, the strength of arbitrage spread is judged according to the positive and negative generations of hedging spread, and the width of arbitrage spread is judged according to the absolute value of arbitrage spread.
The profit condition of cattle spread-hedging spread is getting stronger and stronger. In the forward market, the futures contract price in recent months is lower than that in far months, and the hedging spread is negative. If the near-month contract price bought by the cattle spread rises faster, has a large amplitude or falls slower and has a small amplitude than the far-month contract price, the absolute value of the difference between the near-month contract price and the far-month contract price decreases, the hedging spread narrows, the substitution value tends to zero, and the hedging spread becomes stronger. At this point, the closing profit of selling the contract in the near month is greater than the closing loss of buying the contract in the far month, or
In the reverse market, the futures contract price in recent months is higher than that in far months, and the hedging spread is positive. If the price of the near-term contract bought by the cattle spread rises faster and more sharply than that of the far-term contract, the price rises higher and higher, or the far-term contract price falls faster and harder, and the price falls lower and lower, then the gap between the near-term contract price and the far-term contract price increases, and the hedging spread widens.
Similarly, it can be inferred that when the forward market hedging spread widens and the reverse market hedging spread narrows, that is, when the arbitrage spread weakens, there is a net loss in the bull market spread. Therefore, the profit condition of the bull spread is that the hedging spread becomes stronger.
For example, the old sugar is consumed in June 10, and the new sugar is generally listed around June 65438+February, so the hedging of sugar factories is often to establish hedging positions, but after the Spring Festival, it is the off-season of white sugar consumption, and the performance of white sugar futures contracts in May is relatively weak. Because sugar is still in the process of increasing production periodically, investors are worried that the futures price will fall with the listing of new sugar, but the decline of 1 contract is less than that of May contract.
At the end of 10, the spot price of sugar rose 1 month contract exceeded 200, while the contract spread of 1 month/may contract had reached below -50. For example, when the spread is -56, investors buy the 100 hand sugar 1 month contract and sell the 100 hand sugar May contract.
If the change of hedging spread weakens, the net loss of arbitrage results is shown in Table 2.
The above only shows that in the forward market, the long spread gains when the hedging spread becomes stronger and the long spread loses when the arbitrage spread becomes weaker. Similarly, the same conclusion can be inferred in the reverse market.
The profit condition of bear market hedging-hedging spread is weakening. The profit and loss conditions of bear market arbitrage are just the opposite of the bull market spread. Using the same analysis method as the bull market spread, we can draw a conclusion: the normal market hedging spread expands and the reverse market hedging spread narrows, that is, the bear market arbitrage net profit when the hedging spread weakens; Hedge spread narrows in the normal market and widens in the reverse market, that is, the net loss of bear market arbitrage when the hedge spread becomes stronger. The following is only an example to supplement the explanation.
For example, since March this year, Sino-US trade friction has been escalating. In the first half of this year, China countered the US tariff behavior and imposed a 25% tariff on imported American soybeans. In March and April, domestic traders and terminal feed mills were worried that the domestic soybean supply would be cut off in the future, so they bought a lot of long-term soybean meal, and domestic oil mills made a profit of more than 300 yuan/ton, so they bought a lot of Brazilian soybeans. With the weakening of consumption in April, investors expect that there will be an oversupply of domestic soybean meal in the third quarter, and oil plants may expand production and stop working. So in early April, we sold the September soybean meal contract and bought the 65438+ 10 soybean meal contract. The results are shown in Table 3:
If the hedging spread changes sharply, the arbitrage result will be a net loss, as shown in Table 4:
The above only shows that the bear market arbitrage gains when the hedging spread becomes weaker and loses when the reverse market arbitrage spread becomes stronger. Similarly, the same conclusion can be drawn in the forward market.
Arbitrage contract selection principle
Because the bull spread can be profitable when the hedging spread becomes stronger, and the bear market arbitrage can be profitable when the hedging spread becomes weaker, it is best to choose the two contracts with the weakest (most negative) average hedging spread when establishing the hedging profit position. Bear market arbitrage is best to choose the two contracts with the strongest (most positive) average hedging spread. In order to compare the hedging spreads of different monthly portfolios on the same basis, the monthly average hedging spreads are usually used to compare and select a pair of monthly portfolios that best meet the hedging profit profit conditions.
In the forward market, the more negative the average hedging spread, that is, the greater the premium of the far-month contract price, the higher the far-month contract price, the more profitable it is to sell the far-month contract, and the lower the near-month contract price, the more profitable it is to buy the near-month contract. Similarly, in the reverse market, the more negative the average hedging spread is (the more negative it is, the smaller the positive value is), the more profitable it is to buy the near-month contract and sell the far-month contract. Therefore, Niusan chooses the two contracts with the weakest (negative) hedging spread, and the hedging spread is most likely to change strongly, which is most in line with the conditions of Niusan's profitability.
Contrary to the bull spread, in the forward market, the more positive the average hedging spread is, the greater the discount on the far-month contract price, the higher the near-month contract price, the greater the probability of selling the near-month contract and making a profit, and the lower the far-month contract price, the greater the space for buying the far-month contract. Similarly, in the reverse market, the bigger and more positive the average hedging price difference is, the greater the arbitrage profit tendency when selling near-term contracts and buying far-term contracts. Therefore, the bear market arbitrage chooses the two contracts with the strongest (most positive) hedging spread, that is, the widest contract spread can only return to the narrow spread, which is most in line with the conditions of bear market arbitrage profit.
The relationship between speculation, spot arbitrage and hedging
The relationship between speculation and hedging
The futures market consists of hedgers and speculators. The success of hedging depends on moderate speculation in the futures market to a certain extent, and speculation plays a vital role in the futures market. Hedging is the fundamental reason for the existence of the futures market, but if there are not enough speculators, the futures market will lack liquidity; If there are not enough speculators, no one will bear the risk of the market; Without enough speculators to make up the difference between selling and buying hedging, it will be difficult to close the hedging contract and hedge, and the efficiency of hedging will be greatly reduced.
Among the participants in the futures market, speculators account for far more than hedgers. The Agricultural Products Trading Administration of the United States Department of Agriculture conducted a sample survey of some commodity futures markets, requiring all members who declare positions to provide detailed information of each customer, including the number of positions (whether long or short or spread trading, whether hedging or speculation), as well as the occupation and address of the customer. The survey results show that hedgers account for about 10% of market participants.
Hedgers are closely related to speculation. Since hedging is the basis of the futures market, what is the position of speculation? Hedging depends on speculation. From 1948 to 1958, the research on the proportion of hedging and speculative positions in short positions in the US futures market shows that it is difficult to achieve a balance between short hedging positions and long hedging positions, and the unbalanced part must be filled by speculative positions.
First, the position and quantity of the hedging net position determine the position and quantity of the corresponding speculative position. Secondly, a certain amount of hedging positions need more speculative positions to adapt to it. Third, hedgers prefer highly liquid markets. The higher the liquidity of the futures market, the easier it is for hedgers to enter and leave the market. In the futures trading of some commodities, the hedging of these commodities is limited to some extent because there are not enough speculative transactions to hedge in sedan chair. Finally, moderate speculation is conducive to improving the efficiency of hedging transactions. One of the criteria to measure the efficiency of hedging transaction is hedging cost. In the market with small volume and inactive trading, it is difficult to close the hedging transaction at the right price and at the right time, which undoubtedly increases the cost and risk of hedging.
The relationship between spot arbitrage (physical delivery) and hedging
For hedging, the accepted operating procedure at home and abroad is to buy futures contracts with equal quantity and opposite direction in the futures market at the same time. There are several reasons why many enterprises do not directly buy and sell spot (usually less than 3%) in the futures market:
First, from a macro perspective, the futures market is not a logistics market, and the futures market does not have the function of spatial allocation of resources. The spatial allocation of resources is carried out in the spot market.
Second, from a micro point of view, the business of commodity production, processing and trading enterprises mainly depends on the spot market. Their business expansion, market consolidation and development are mainly carried out in the spot market. Through long-term efforts, they have developed relatively fixed customers in their business and established relatively stable sources of goods and sales channels, thus ensuring the orderly conduct of business activities. The standardization of futures market transactions cannot meet the specific requirements of different enterprises and the diversified needs of the market at the same time.
Thirdly, from the relationship between the futures market and the spot market, the futures market provides a safe haven and hedging tool for enterprises by ironing the spot price, which ensures the stable development of the spot market. No matter from the development history or the function of the futures market, we can't confuse the futures market with the spot market.
Futures contracts bought and sold for hedging only temporarily replaced the planned spot contracts. Before the planned spot contract is reached, there are many uncertainties in the change of spot market price, which affect the normal operation and profit realization of enterprises. Hedgers use the futures market to eliminate the negative impact of this uncertainty on business. Hedging is to buy and sell futures contracts according to standard terms, which is reached in the exchange and supervised by the exchange. In fact, the purpose of replacing non-standardized spot contracts with standardized futures contracts is to determine the price of spot commodities to be bought and sold in advance through the futures market to ensure the smooth realization of expected profits. Once this spot contract is reached, the futures contract has completed its historical mission as a temporary substitute for the spot contract, and the hedger must hedge the futures contract.
There are some differences between the trading of delivery futures contracts and hedging. In fact, the futures contract transactions conducted by enterprises in the futures market for delivery are regarded as the continuation of spot trading activities and the futures market as an integral part of the spot market. Futures trading for physical delivery should be regarded as pure forward trading, not hedging. Using a highly standardized contract format to serve all its commercial forward transactions (futures contracts) is not essentially different from ordinary forward commercial transactions.
In recent years, with the rise of domestic basis trading, futures price, as the basic pricing tool of spot trading, has played an increasingly obvious role. Through the basis transaction, the hedging is completed by the buyer and the seller, and the risk is further transferred downwards. At the same time, the separation of goods right and pricing right before the completion of spot trading has greatly enriched the flexibility of spot trading, and there is still a huge room for development in China in the future.