Arbitrage means buying and selling two different futures contracts at the same time. Traders buy contracts that they think are "cheap" and sell those "high-priced" contracts at the same time, benefiting from the changing relationship between the prices of the two contracts. In arbitrage, traders are concerned about the mutual price relationship between contracts, not the absolute price level. Arbitrage is a trading method that uses unreasonable price differences between different markets (or at different times, or in different regions and varieties) to seek low-risk profits.

Basic difference

Basis is an indispensable tool for our investment and trading, and judging the market situation and the trend of futures varieties by basis is one of the basic tools for hedging. Basis refers to the difference between the spot price of a specific commodity at a specific time and place and the futures price of the commodity in the futures market, that is, basis = spot price-futures price.

For example, the spot price of corn on July 15 was 2095.7 1 yuan/ton, and the price of Dalian Commodity Exchange on that day was 2 146 yuan/ton, so the basis was -50.29 yuan/ton. For example, the spot price of starch in July 15 is 2620 yuan/ton, and the price in the futures market is 2490 yuan/ton, so the basis is 130 yuan/ton.

So the basis can be positive or negative, depending on whether the spot price is higher or lower than the futures price. If the spot price is higher than the futures price and the basis is positive, it is also called forward discount or spot premium; If the spot price is lower than the futures price, the basis is negative, which is also called forward premium or spot discount.

Post fee

Position fee refers to the sum of storage fee, insurance premium and interest paid for owning or keeping a certain commodity or asset.

Position fee, basis, arbitrage

Under the topic of arbitrage, we can not only judge the change of spread, but also decide whether to throw futures to buy spot or spot futures according to the direction of spread change, and consider whether the profit target is greater than the cost of holding spot or futures delivery.

Generally speaking, because of the position fee, the futures price is greater than the spot price (the basis is less than 0), and the forward contract price is greater than the recent contract price, which is generally the positive market; On the contrary, if the futures price is less than the spot price and the forward contract price is less than the recent contract price, it is a reverse market. The reason for this may be that there is too little supply or too much demand in the spot market, so everyone is willing to give higher prices to spot and recent contracts.

Then back to the question in front of the article, how to arbitrage when the futures price is greater than the spot price?

First of all, if the spread is higher than the position fee, the arbitrageur can buy the spot and sell the relevant futures contract at the same time, and then use the bought spot for delivery when the contract expires. After deducting the position cost after buying the spot, the spread income still exists, resulting in arbitrage profit.

On the contrary, if the spread is much smaller than the position fee, the arbitrageur can sell the spot and buy the relevant futures contract at the same time. When the contract expires, the spot obtained by delivery will be used to make up for the spot sold before, and the price difference loss is less than the saved position fee, thus generating profits.