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.
Arbitrage has two functions in the futures market: first, arbitrage provides investors with hedging opportunities; Secondly, it helps to restore distorted market prices to normal levels.
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.
Disadvantages of arbitrage: limited returns
Perhaps the biggest disadvantage of arbitrage in the minds of many traders is the limited potential income. Of course it's true. 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.