Cross-variety arbitrage refers to arbitrage trading by using the price difference between two (or more) different but interrelated assets. When the price difference between the two contracts expands to a certain extent, the position is closed.

Second, the theoretical basis of cross-species arbitrage

The correlation between different contract prices is a necessary and sufficient condition for arbitrage. Logically speaking, different varieties of arbitrage transactions need to have internal relations, which may be reflected in two aspects: First, they are substitutable in function, sowing area and yield, and belong to complementary products. Arbitrage strategies that meet this feature include rebar and wire arbitrage, soybean oil and palm oil arbitrage, wheat and corn arbitrage, cotton and PTA arbitrage; Second, different varieties participating in arbitrage strategy are distributed in the same industrial chain, and their prices are constrained by costs and profits, which will have a certain degree of correlation. This cross-species arbitrage includes soybean and soybean meal, oil-squeezing arbitrage, iron ore, coke and rebar arbitrage.

Cross-variety arbitrage is based on the following theories:

There is a logic of "price difference regression" between the two varieties. In other words, under normal circumstances, quasi-arbitrage varieties have a binding mechanism, so unreasonable price relations will always return to rationality after a certain period of time.

The futures market is effective, and resources can always be effectively allocated in a certain time and space. In other words, the preference of funds or the external performance of market prices can effectively promote the spread to return to normal.

For a period of time, the spread of arbitrage varieties always fluctuates around the normal theoretical spread. Even if the price difference deviates from the normal price difference at a certain moment, it will always return to the normal price difference as time goes by.

Third, the discovery of cross-species arbitrage opportunities.

Cross-variety arbitrage is to seek to lock in the profits generated in the process of price difference or price comparison returning from unreasonable range to reasonable range. We can find arbitrage opportunities from relative price changes, mainly in the following situations:

The fluctuation range of arbitrage varieties is different. When the price trends of related varieties tend to be consistent, but their fluctuations are different-that is, when one commodity contract rises or falls faster than another commodity contract, the success of arbitrage strategy depends on the degree of price difference between the two commodity contracts.

There is a time difference in the price changes of related commodities. When the prices of related varieties change in the same direction, the speed of change is likely to be different. When there is priority, it creates conditions for the deviation and regression of price difference.

There are differences in the degree of fundamental changes of related commodities. For related varieties, even if it is the same factor, the impact on different varieties of markets may not be exactly the same, which will lead to the unsynchronized or even short-term deviation of their price trends in the same time period, and then generate arbitrage opportunities.