Arbitrage is also called spread trading. Arbitrage refers to buying or selling an electronic trading contract while selling or buying another related contract.
Arbitrage, also known as arbitrage, usually refers to buying a physical asset or financial asset at a lower price and selling it at a higher price when there are two prices (in the same market or in different markets), thus obtaining risk-free income.
Arbitrage refers to trying to profit from the price difference of the same or similar financial products in different markets or in different forms.
2. Example:
A market apples 10 yuan 1 kg, B market apples 15 yuan 1 kg, then you can buy apples in A and sell apples in B, so you can make a profit in 5 yuan without risk.
Tianjin precious metal exchange, the price of silver is * * * yuan/kg, with one hand 1 kg and one hand 15 kg;
Shanghai Gold Exchange, the price of silver T+D is * * * yuan/kg, and the first price is 1 kg;
Generally speaking, the T+D of silver is about 180-200 higher than that of Tianjin Silver.
All are operated by one hand 1 kg,
When the silver T+D is higher than Tianjin Silver 100, do more silver T+D and short Tiantong Silver;
When the T+D of silver is 200 higher than that of Tianjin silver, short the T+D of silver and make long-term silver;
This is a general idea of operation. If the cost is relatively low, it can be operated in a large space.
Although the risk of arbitrage trading is lower than that of unilateral trading in theory, its risk cannot be underestimated. Taking stock spread arbitrage as an example, although the risk of stock spread arbitrage trading is generally low, there is still the possibility that extreme price changes will lead to a significant increase in risk, especially in the period when the financial crisis leads to intensified price fluctuations. If the margin takes up too much, the leverage is too large, and the price fluctuates greatly, it is easy to have insufficient margin.
It is precisely because of various practical risks that arbitrage trading has not been fully carried out in some markets. The factors that hinder the full implementation of arbitrage are collectively called "restrictive factors of arbitrage".
Arbitrage trading can be divided into two types:
One is spot arbitrage, that is, arbitrage between futures and spot;
Second, arbitrage of spreads between different months, different varieties and different markets in the futures market is called spread trading. According to the different operating objects, spread trading can be divided into three types: intertemporal arbitrage, cross-variety arbitrage and cross-market arbitrage.
References:
Baidu encyclopedia-arbitrage Baidu encyclopedia-arbitrage trading
Analysis of advantages and disadvantages of arbitrage trading The risk of arbitrage trading is small and the income is stable. For large funds, if they participate in unilateral heavy positions, they will face the disadvantages of high cost and high risk. On the contrary, if they are involved unilaterally, although the risk may be reduced, their opportunity cost and time cost are also high. Therefore, on the whole, it is difficult to obtain relatively stable and ideal returns if large funds are unilaterally heavy or unilaterally light. However, if large funds intervene in the futures market with long and short positions, that is, carry out arbitrage trading, which can not only avoid the risks faced by unilateral positions, but also obtain relatively stable returns.
Advantages of arbitrage trading
1, with low volatility. Arbitrage trades profit from the spread of different contracts, and a significant advantage of the spread is that it usually has low volatility, so arbitrageurs face less risk. Generally speaking, the fluctuation of the spread is much smaller than that of the futures price. For example, the daily price of copper traded in Shanghai Futures Exchange is generally 400-700 yuan/ton, but the price difference between adjacent delivery months is about 80- 100 yuan/ton. Many commodity prices fluctuate greatly and need to be monitored every day. The intraday fluctuation of the price difference is often very small, and it only needs to be monitored several times a day or even less. If the funds in the account fluctuate greatly, speculators must deposit more funds to prevent possible losses. Using arbitrage trading, there are few such concerns.
2. The risk is limited. Arbitrage is the only futures trading method with limited risk. Because of the existence of arbitrage and the competitive choice between arbitrageurs, the price deviation between futures contracts will be corrected. Considering the transaction cost of arbitrage, the spread between futures contracts will remain within a reasonable range, so it is rare for the spread to exceed this range. This means that you can set arbitrage positions in historical high or low areas according to the historical statistics of spreads, and at the same time you can estimate the risk level you have to bear.
3. The risk is lower. Because of its hedging nature, arbitrage trading is usually less risky than unilateral trading. This is an important factor that we need to consider when comparing arbitrage and unilateral trading. Why is the risk lower? Portfolio theory shows that a portfolio consisting of two completely negatively related assets can minimize portfolio risk. Arbitrage is to buy and sell two highly correlated futures contracts at the same time, that is, to build a portfolio consisting of two almost completely negatively correlated assets, and the risk of this portfolio is naturally greatly reduced.
4. Protection against ups and downs. The hedging characteristics of many arbitrage transactions can protect the supply from ups and downs. Because of political events, weather, and government reports, futures prices can go up and down, and sometimes even cause them to go up and down. Prices are blocked on the price limit and cannot be traded. An upside-down unilateral trader will suffer heavy losses before closing his position. This usually leads to a deficit in the trader's account and requires additional margin. In the same environment, arbitrage traders are basically protected. Take intertemporal arbitrage as an example. Because an arbitrage trader is both long and short on the same commodity, his account usually doesn't suffer big losses on the trading day. Although the spread may not follow the direction predicted by traders after the ups and downs stop, the losses caused by it are often much smaller than those caused by unilateral trading.
5. More attractive risk/reward ratio. Compared with a given unilateral position, an arbitrage position can provide a more attractive risk/return ratio. Although the profit of each arbitrage transaction is not very high, the success rate is very high, which is the advantage of limited risk, lower risk and lower volatility of spread. In the long run, only a few people profit from unilateral trading, and often no more than three people profit from 10. Arbitrage, on the other hand, has the characteristics of stable income and low risk, so it has a more attractive income/risk ratio and is more suitable for the operation of large funds. In the process of fierce competition between long and short sides holding unilateral positions, arbitrageurs can often take the opportunity to intervene and make profits easily.
6. The price difference is easier to predict than the price. Because futures prices fluctuate greatly, it is difficult to predict. In a bull market, futures prices will rise unexpectedly, while in a bear market, futures prices will fall unexpectedly. Arbitrage trading does not directly predict the price changes of future futures contracts, but predicts the price difference caused by future supply and demand changes. The latter prediction is obviously much less difficult than the former one. It is very complicated to determine the relationship between supply and demand that will affect commodity prices in the future. Although there are laws to follow, it still contains many uncertainties. It is unnecessary to consider all the factors that affect the relationship between supply and demand when forecasting the price difference. Because of the correlation between the two futures contracts, many uncertain supply and demand relations will only cause the prices of the two contracts to rise and fall together, and have little effect on the spread, so this supply and demand relationship can be ignored. To predict the price difference between two contracts, we only need to pay attention to the difference of each contract's response to the same change in supply and demand, which determines the direction and extent of the price difference.
Disadvantages of arbitrage trading
Everything has two sides, and arbitrage is no exception. In addition to the above advantages, there are several disadvantages:
1, the potential income is limited. In the eyes of many investors, the biggest disadvantage of arbitrage is the limited potential income. This is normal. 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.
2. Excellent arbitrage opportunities rarely appear frequently. The number of arbitrage opportunities is closely related to the efficiency of the market. The lower the market efficiency, the more arbitrage opportunities; The higher the market efficiency, the less arbitrage opportunities. As far as the domestic futures market is concerned, the efficiency is not high, and each futures product has several good arbitrage opportunities every year. However, compared with the unilateral megatrend, there are many arbitrage opportunities every year.
3. Arbitrage also has risks. Although arbitrage has the advantages of limited risk and low risk, it is still risky. This risk comes from: price deviation continues to be wrong. The strong-weak relationship between contracts tends to maintain the trend of "the strong will be strong and the weak will be weak" in the short term. If this price deviation is finally corrected, the arbitrageur will have to suffer temporary losses in this transaction. If investors can bear such losses, they will eventually turn losses into profits, but sometimes investors will not survive the loss period. Moreover, if the short contract is run until the contract is delivered and the price deviation is not corrected, the arbitrage transaction will end in failure.
What is unilateral futures trading and what is arbitrage trading? Unilateral transaction: refers to the buyer's market or the seller's market at the same time. The normal transaction in the market should be that there are active transactions between buyers and sellers, but in a certain period of time or in a certain area, the market suddenly becomes an all-buyer's market or an all-seller's market.
Arbitrage transaction: refers to foreign exchange transactions in which funds are transferred from countries or regions with lower interest rates to countries or regions with higher interest rates by taking advantage of the differences in short-term interest rates in different countries or regions, so as to obtain spread income.
The main characteristics of unilateral transactions:
1. Under unilateral trading, you can only buy up to make money (long) or buy down to make money (short).
2. China A-share market is a unilateral transaction, that is, one-way transaction, that is, it can only buy up and make money (make more money).
The main characteristics of arbitrage trading:
1. The risk is lower: the price difference between different futures contracts is far less drastic than the absolute price level, thus reducing the risk accordingly. In particular, the risk of unexpected events affecting the disk surface is avoided. Due to bilateral positions, it is difficult for the main institutions to force arbitrage traders to reduce their positions.
2. Facilitating the entry and exit of large funds: Arbitrage itself requires a lot of funds, so it can attract large funds to enter the market.
Extended data
Disadvantages of arbitrage trading:
1. Risk: The risk comes from: the price deviation continues to deviate. The strong-weak relationship between contracts tends to maintain the trend of "the strong will be strong and the weak will be weak" in the short term. If this price deviation is finally corrected, the arbitrageur will have to suffer temporary losses in this transaction.
2. Limited: When the risks in the transaction are limited, the potential benefits are usually limited. However, whether to choose arbitrage trading in the end depends on many advantages and limited potential benefits of arbitrage.
3. Under normal circumstances, the price difference between contracts participating in arbitrage trading is far less than the price change of a single contract, which is a trading method with low risk and stable income. Therefore, arbitrage trading is mainly the investment choice of traders with large amount of funds or stable style.
reference data
Baidu Encyclopedia-Unilateral Trading
Baidu encyclopedia-arbitrage trading
What is arbitrage trading? Question 1: What is an arbitrage transaction?
Question 2: What does arbitrage mean?
Arbitrage trading, also known as hedging profit, refers to buying and selling two different futures contracts at the same time. 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.
What is arbitrage? Is arbitrage illegal? Arbitrage is also called "interest arbitrage". Arbitrage is not illegal.
Arbitrage has two main forms:
(1) No arbitrage. That is to use the spread of arbitrage transactions in the capital markets of the two countries to transfer short-term funds from the low interest rate market to the high interest rate market in order to obtain spread income.
(2) arbitrage. That is to say, the arbitrageurs use forward foreign exchange transactions to avoid the risk of exchange rate changes while transferring short-term funds from place A to place B for arbitrage.
Arbitrage will change the relationship between supply and demand in different capital markets, make the short-term capital interest rates in different places tend to be consistent, narrow the difference between the recent exchange rate and the forward exchange rate of money, and keep the interest rate difference in the capital market in balance with the exchange rate difference in the foreign exchange market, thus objectively strengthening the integration of international financial markets.
However, a large number of arbitrage activities will lead to a large-scale international flow of short-term capital and aggravate the turmoil in the international financial market.
Extended data arbitrage trading:
Arbitrage trading modes are mainly divided into four types, namely: stock index futures arbitrage, commodity futures arbitrage, statistics and option arbitrage.
1, stock index futures arbitrage
Arbitrage of stock index futures refers to the behavior of taking advantage of the unreasonable price of stock index futures market, participating in the trading of stock index futures and stock spot market at the same time, or trading stock index contracts with different maturities and different (but similar) categories at the same time to earn the difference. Stock index futures arbitrage is divided into futures arbitrage, intertemporal arbitrage, cross-market arbitrage and cross-variety arbitrage.
2. Commodity futures arbitrage
Similar to the hedging of stock index futures, commodity futures also have arbitrage strategies. When buying or selling a futures contract, they sell or buy another related contract and close both contracts at a certain time.
It is similar to hedging in transaction form, but hedging is an arbitrage transaction that buys (or sells) physical objects in the spot market and sells (or buys) futures contracts in the futures market. Arbitrage only buys and sells contracts in the futures market, and does not involve spot trading. There are four kinds of commodity futures arbitrage: spot arbitrage, intertemporal arbitrage, cross-market arbitrage and cross-variety arbitrage.
3. Statistical arbitrage
Different from risk-free arbitrage, statistical arbitrage is a kind of risk arbitrage by using the historical statistical law of securities prices, and its risk lies in whether this historical statistical law will continue to exist in the future.
The main idea of statistical hedging is to find several pairs of investment products (stocks or futures, etc.). ) has the best correlation, and then find out the long-term equilibrium relationship (cointegration relationship) of each pair of investment products. When the price difference between a pair of products (the residual of the cointegration equation) deviates to a certain extent, we start to open positions-buying relatively undervalued varieties, shorting relatively overvalued varieties, and making profits when the price difference returns to equilibrium.
The main contents of statistical hedging include stock matching transaction, stock index arbitrage, short-selling hedging and foreign exchange arbitrage transaction.
Option arbitrage
Option, also known as option, is a derivative financial instrument based on futures. The essence of option is to price the rights and obligations in the financial field separately, so that the transferee of the right can exercise his right to trade or not to trade within a specified time, and the obligor must perform it.
When trading options, the buyer is called the buyer and the seller is called the seller. The buyer is the transferee of the right, and the seller is the obligor who must fulfill the buyer's right.
The advantages of options are unlimited income and limited risk loss. Therefore, in many cases, using options instead of futures for short-selling and arbitrage trading will have less risk and higher returns than simply using futures arbitrage.
Baidu encyclopedia-arbitrage