SHFE/LME's Cross-market Arbitrage Principle The theoretical basis of cross-market arbitrage is spot import and export trade. Under the normal import and export trade, there is a normal price relationship between spot copper at home and abroad. However, when the market is distorted and the contract price ratio between SHFE and LME deviates from the normal level, cross-market arbitrage can be carried out. Due to the distorted price ratio between the two places, it will drive relevant traders to make profits through import and export, and a large number of logistics will rebalance the prices of the two places in a short time. Therefore, an arbitrage transaction is completed by distorting the market and closing the position normally. The following March price charts of LME3 copper and Shanghai copper are continuous. As can be seen from the figure, although the two trends tend to rise and fall together, and the recent correlation is as high as 92.58%, in some periods, the domestic and international trends are different, and there are opportunities for cross-market arbitrage. Figure: Trend chart of copper prices at home and abroad. Firstly, from the perspective of trade cost, the maximum arbitrage-free range of domestic and foreign price comparisons is determined. Upper limit of range: once the domestic price ratio reaches the upper limit of range, we think that importing foreign copper into China is only to protect the capital. In other words, LME copper price is exactly equal to the domestic copper price due in three months after deducting customs duties, value-added tax and transportation costs. If the price is higher than this upper limit, the import will be profitable. The calculation formula is as follows: the current import tariff is 0%, the value-added tax is 17%, and the miscellaneous freight is assumed to be 1 1,000 yuan/ton (this parameter can be modified and increased according to individual circumstances). The exchange rate of NDF3 in March represents the market's forecast of the exchange rate of RMB against the US dollar in three months. Taking 65438+1October 65438+July 2008 as an example, the closing price of Shanghai copper futures 0803 is 60300 yuan/ton; In March, the copper price of LME3 was 7 100 USD/ton, and the exchange rate of NDF3 was 7.095438+0. Then substitute into the formula: interval lower limit: once the domestic price ratio reaches the interval lower limit, we think that domestic copper exports to foreign countries just broke the capital. In other words, the domestic copper futures price is exactly equal to LME copper price after deducting customs duties, value-added tax and transportation costs. If the exchange rate is lower than this lower limit, the export will be profitable. The calculation formula is: where the current export tariff is 15%, the value-added tax is 17%, and the freight is assumed to be 1000 yuan/ton (this parameter can be modified and increased according to individual circumstances). The exchange rate of NDF3 in March represents the market's forecast of the exchange rate of RMB against the US dollar in three months. Taking 65438+1October 65438+July 2008 as an example, the closing price of Shanghai copper futures 0803 is 60300 yuan/ton; In March, the copper price of LME3 was 7 100 USD/ton, the exchange rate of NDF3 was 7.09 1 in March, and the current exchange rate was 7.2475. Substitution formula: Take the above calculation as an example: June 65438+1October 17, 2008, the no-arbitrage interval [b, a] is [7.0946, 8.4373], and the domestic and foreign exchange rates on that day are: 60300/7100 = (Note: In the above model, investors should set parameters according to their own conditions to make arbitrage more effective. Next, we make a statistical analysis of the historical data of copper price comparison at home and abroad. Below is the chart of price comparison, which shows that the price comparison is declining. In addition to the different trends of copper prices at home and abroad, a big factor is the appreciation of RMB against the US dollar, which makes the exchange rate decline. Figure: Comparison trend chart of copper prices at home and abroad In addition, we have made statistics on the operation of copper price difference at home and abroad in different time spans, and obtained the maximum value, minimum value and average value of price comparison, as shown in the following table. It can be seen that the exchange rate at home and abroad was 60300/7 100=8.49 on the day of 65438+ 10/7 in 2008, which was higher than the recent average level. From a statistical point of view, we can also adopt the strategy of "buying LME copper and throwing domestic copper" to carry out cross-market arbitrage. Table: The historical statistical results show that the maximum value and minimum value of statistical time span are the latest 65438+1October 8.65928.13218.4661to 3 months 8.8208+0297 8.4170 respectively. To 1, 9.7474 8.1523 8.995812 years,10/8.1575 9.2468 capital requirements: suppose an arbitrageur intends to cross the domestic and foreign markets. LME3 copper price in March is 7 100 USD/ton; The exchange rate then was 7.2475. Assume that the margin requirement of Shanghai Stock Exchange is 9%, and the opening margin of LME Copper is $65438 +05625, which is equivalent to the margin level of 8.8%. Then investors need to invest 600 lots of Shanghai copper, 60300 * 3000 * 9% =16,2810,000 RMB LME copper: 120 lots, 120 * 1566. In order to prevent the exchange from temporarily adding margin, and the remaining funds can withstand the 4% limit, it is safer to use 15% margin, but it may be relatively conservative. (The specific situation depends on the investor's financing ability in a short period of time). In addition, according to the statistical results of the recent 1 month, the maximum value is 8.6592, and the minimum value is 8. 132 1. Assuming that investors have completely mastered the high and low points, simply calculate the return at around 30% (assuming 10%). Finally, when conducting cross-market arbitrage, we need to pay attention to the following matters: L market may have price distortion for a long time, so there is also the risk of cross-market arbitrage failure. Pay attention to policy risks, because the adjustment of import and export tariffs by the state will affect the success or failure of arbitrage. L pay attention to the risk of dollar depreciation. At present, the dollar is in a downward trend. Try to reduce the arbitrage mode of "throwing LME copper and buying domestic copper", because it will lose some arbitrage profits because of the depreciation of the dollar. I pay attention to the term structure of LME. Under the term structure of LME forward premium, it is more favorable to throw LME copper; Under the term structure of LME long-term discount, it is more favorable to buy LME copper. L Pay attention to fund management, because cross-market arbitrage will always face losses while making profits, so it is necessary to better allocate funds. In addition, in the unilateral strong market, if cross-market arbitrage is carried out, it is suggested to control the position well to avoid arbitrage failure due to the failure to add margin in time due to excessive chasing funds. In addition, funds should be reserved to prevent the exchange from temporarily raising the margin level. L admission opportunity. It is suggested to establish arbitrage positions in batches after considering the price trend. At the same time, opening positions at home and abroad must follow the "simultaneity".