Under normal circumstances, the spot price is lower than the futures price or the recent monthly contract price is lower than the forward monthly contract price, which is called an active market. Forward market is also called normal market. The forward market is divided into two situations, one is that the futures price is higher than the spot price, and the other is that the forward contract price is higher than the recent contract price. Because the futures market needs to compensate the position fee, in theory, the futures price should be higher than the spot price. The price of the forward contract is correspondingly higher than that of the recent contract.
Long-term reasons for futures prices
Under the normal circumstances of sufficient spot supply and large inventory, the reason why the futures price is higher than the spot price should include the cost of holding positions. Position fee refers to the sum of storage fee, insurance premium and interest paid for owning or keeping a certain commodity or securities. If the futures price is the same as the spot price, it is obvious that enterprises will choose to buy goods in the futures market instead of the spot market, which will increase the demand in the futures market and reduce the demand in the spot market, so that the futures price will rise and the spot price will fall until the part of the futures contract that is higher than the spot price is the same as the position fee. At this time, it makes no difference whether the enterprise chooses to buy goods in the futures market or the spot market.
Therefore, in the forward market, the part where the futures price is higher than the spot price is related to the position fee, which reflects the time value in the formation of the futures price. The holding fee is related to the holding time. Generally speaking, the closer the delivery deadline is, the lower the cost of holding goods, and the less the futures price is higher than the spot price. When the delivery month comes, the position fee is reduced to zero, and the futures price and spot price converge. Therefore, from a dynamic point of view, due to the influence of the same supply and demand relationship and the role of position fees, the changes of spot prices and futures prices show the same convergence law.
Forward long spread
Company arbitrage
When the absolute value of the spread is greater than the cost of the position, there will be a firm arbitrage opportunity in the forward market. At this point, you can make long contracts in recent months and establish short contracts with the same position in distant months. Receipt of warehouse receipts in recent months, and delivery and liquidation of warehouse receipts in distant months, can obtain risk-free income.
Hedging arbitrage
If the supply in the forward market is insufficient and the demand is relatively strong, the contract price will increase more than the forward monthly contract, or the contract price will decrease less than the forward monthly contract. You can do more in the near contract, short in the far contract, and establish the same warehouse arbitrage operation.
Arbitrage income = position × {(forward monthly selling price-near monthly buying price)-(forward monthly buying price-near monthly selling price)}
The spread is the difference between the contract price with high price and the contract price with low price when opening or closing positions. The forward contract price is higher than the recent contract price in the forward market. When opening positions, the spread B 1= forward contract price-recent contract price. When closing positions, the spread B2= forward contract price-recent contract price.
Arbitrage income = position ×(B 1-B2)
If the B2 spread narrows, the arbitrage will be profitable. At this point, it reflects the premium of recent contracts to forward contracts.
On the contrary, if the B2 spread widens, the arbitrage trade will lose money. At this point, reflecting the premium of the forward contract to the recent contract, investors either stop the loss in time or move their positions while insisting on the price difference judgment.
Positive bear market arbitrage
If there is an oversupply in the market and the demand is relatively insufficient, the contract price in the latest month will drop more than the forward contract price, or the contract price in the latest month will rise less than the forward contract price. Or, at this time, you can carry out arbitrage operation, short the contract in the near month, and establish a long contract with the same position in the far month.
Arbitrage income = position × {(recent month's selling price-forward buying price)-(recent month's buying price-forward selling price)}
Because the price of forward futures is higher, (near-month selling price-forward-month buying price) and (near-month buying price-forward-month selling price) are both negative.
When opening positions, the spread B 1= forward contract price-recent contract price > 0. When closing positions, the spread B2= forward contract price-recent contract price > 0.
Therefore, arbitrage gains = positions ×(B2-B 1)
When the spread B2 is greater than B 1, the arbitrage trade will make a profit; When the spread narrows, arbitrage will lose money.