Futures Investment Theory

3. Futures arbitrage

(6) Methods of futures arbitrage

There are three main forms of arbitrage in the futures market, namely, cross delivery month arbitrage, cross market arbitrage and cross commodity arbitrage.

① Cross month arbitrage (cross month arbitrage)

An activity in which speculators buy futures contracts in one delivery month and sell similar futures contracts in another delivery month in the same market to make profits by taking advantage of the changes in the price gap between different delivery periods of the same commodity. Its essence is to make profits by taking advantage of the relative changes in the price difference between different delivery months of the same commodity futures contract. This is the most commonly used form of arbitrage. For example, if you notice that the price difference between May soybean and July soybean exceeds the normal delivery and storage fees, you should buy the May soybean contract and sell the July soybean contract. Later, when the July soybean contract is closer to the May soybean contract and the price difference between the two contracts is narrowed, you can gain a profit from the change of the price difference. Cross month arbitrage is not related to the absolute price of commodities, but only to the trend of price difference between different delivery periods.

Specifically, this arbitrage can be divided into three types: bull market arbitrage, bear market arbitrage and butterfly arbitrage.

② Cross market arbitrage

Speculators take advantage of the different futures prices of the same commodity in different exchanges to buy and sell futures contracts in two exchanges at the same time to make profits.

When the price difference of the same commodity in two exchanges exceeds the cost of transporting the commodity from the delivery warehouse of one exchange to the delivery warehouse of another exchange, it can be expected that their prices will shrink and reflect the real cost of cross market delivery in a future period. For example, if the sales price of wheat in the Chicago Stock Exchange is much higher than that in the Kansas City Stock Exchange and exceeds the transportation costs and delivery costs, then there will be spot traders who buy the wheat in the Kansas City Stock Exchange and ship it to the Chicago Stock Exchange for delivery.

③ Cross commodity arbitrage

The so-called cross commodity arbitrage refers to arbitrage by using the difference in futures prices between two different but related commodities, that is, buying (selling) futures contracts for a commodity in a delivery month, while simultaneously selling (buying) futures contracts for another commodity in the same delivery month.