Arbitrage trading, also called hedging profit, refers to taking advantage of the differences in short-term interest rates in different countries or regions to transfer funds from countries or regions with lower interest rates to countries or regions with higher interest rates for investment in order to obtain interest difference income.
A foreign exchange transaction refers to buying and selling two different types of futures contracts at the same time.
Arbitrage trading: buying one futures[1] contract and selling a different futures contract at the same time. The futures contracts here can be different delivery months of the same futures type.
It can also be two different products that are related to each other.
It can also be the same commodity in different futures markets.
Arbitrage traders are simultaneously long on one futures contract and short on another, making profits through changes in the price difference between the two contracts, which have little to do with the absolute price level.
Arbitrage trading has now become a major trading method in the international financial market. Due to its stable returns and relatively small risks, most large international funds mainly use arbitrage or partial arbitrage to participate in futures or options market transactions. With the standardized development of my country's futures market and the diversification of listed products, the market contains a large number of arbitrage opportunities, and arbitrage trading has become an effective means for some large institutions to participate in the futures market.
When conducting arbitrage trading, investors are concerned with the mutual price relationship between contracts rather than absolute price levels.
Investors buy contracts that they believe are undervalued by the market and sell contracts that they believe are overvalued by the market.
If the direction of price movement is consistent with the original prediction; that is, the price of the purchased contract goes higher and the price of the sold contract goes lower, then investors can profit from the change in the relationship between the prices of the two contracts.
On the contrary, investors will suffer losses.