Application analysis of cross market arbitrage of

2022-10-16
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Application analysis of non-ferrous metal cross market arbitrage

cross market arbitrage refers to when the price difference of the same commodity in two exchanges exceeds the cost of transporting commodities from the delivery warehouse of one exchange to the delivery warehouse of another exchange, buying (or selling) a commodity contract in a delivery month in one market while selling (or buying) the corresponding contract of the same commodity in another market, Take advantage of possible regional price differences to earn profits

cross market arbitrage strategy requires three prerequisites: the quality of the subject matter of futures delivery is the same or similar; There is a strong correlation between the price trends of futures varieties in the two futures markets; The import and export policy is loose, and goods can flow freely in the two countries

from the perspective of the consistency of trade flow and arbitrage direction, cross market arbitrage can generally be divided into forward arbitrage and reverse arbitrage. Generally speaking, the risk of forward arbitrage is small

if the trade direction is consistent with the arbitrage direction, it is called positive cross market arbitrage. For example, domestic copper is mainly imported, and is arbitraging across the market. While long copper in LME, short copper in SHFE. If the trade direction is inconsistent with the arbitrage direction, it is called reverse cross market arbitrage. For example, domestic nickel is mainly imported, and reverse cross market arbitrage is to short nickel in LME and long nickel in SHFE

cross market arbitrage of non-ferrous varieties is generally based on spot import trade between LME market and SHFE market. The change of Shanghai Lun ratio actually reflects the import profit and loss of the trading subject. Therefore, we can calculate the upper limit of the arbitrage range according to the positive arbitrage and the ratio of import cost to import cost, and calculate the lower limit of the arbitrage range according to the reverse arbitrage

cross market arbitrage trading plays a very important role in the orderly development of the futures market and helps to restore the unreasonable futures market price to the normal level through trade flow. Cross market arbitrage trading helps to play the price discovery function in the futures market. Once arbitrageurs find that the price trend of some markets is abnormal, they will use the price difference between different markets to carry out arbitrage trading at any time. This kind of trading will make the price relationship between the push button and the market tend to be normal at this time, so as to promote the formation of a reasonable price in the futures market. In addition, cross market arbitrage trading helps the futures market further improve liquidity. Arbitrage trading improves the activity of the futures market, increases the trading volume of futures trading, and ensures the smooth realization of hedging function. Arbitrageurs bear the risk of relative changes in market prices, which helps to eliminate price manipulation in the futures market and promote the smoothness of trading and the rationalization of prices

influencing factors and cases

generally speaking, we mainly look for the differences between the supply and demand imbalance between the two places from the perspective of fundamentals and find arbitrage strategies. The change of policy will change the fundamentals or expectations of the two markets in a short time, thus changing the trend of Shanghai London ratio. In addition, according to the formula of non-ferrous metal import Arbitrage (taking copper as an example): the reasonable domestic price of London imported copper = (LME3 month copper contract price + spot premium) × RMB/USD exchange rate × (1+ VAT rate) × (1+ tariff) + transportation fee + port miscellaneous fee. The factors that affect cross market arbitrage include exchange rate, tax rate, premium and so on, in addition to the influence of fundamentals and policies

fundamental supply and demand differences

from the historical data, in the first half of 2016, due to the reduction of foreign zinc ore production, it was first transmitted to foreign smelting enterprises, so the foreign zinc price rose, while the domestic zinc price fell due to the increase in import volume and the suppression trend of the high inventory accumulated in the early stage. In the second half of 2016, due to the reduction of foreign zinc ore production and transmission to China, coupled with the inhibition of domestic zinc ore production due to environmental protection problems, domestic zinc ore began to be in short supply, while inventories began to decline, leading to the strengthening of domestic zinc prices, the Shanghai London ratio rebounded, and the import arbitrage space was opened at the end of November

policy impact

policy impact generally affects fundamentals or short-term expectations. The following mainly introduces short-term impact:

emergencies. Emergencies are difficult to predict. Once the safety margin of statistical arbitrage is broken, it is easy to cause panic stampede in the market, resulting in huge fluctuations in the market

in April 2018, because the United States' sanctions on Rusal and the expectation of sanctions on Rusal nickel at the same time, the LME aluminum price and nickel price soared, and the Shanghai London price difference between aluminum and nickel fell rapidly at a low level, breaking through the oscillation range, especially the Shanghai London price difference of nickel fell rapidly

collection and storage. Domestic purchase and storage will lead to a reduction in domestic supply in the short term, breaking the original domestic and international balance, domestic aluminum prices are stronger, and the Shanghai London ratio is higher. According to historical data, at the beginning of December 2015, the domestic aluminum price surged with the depreciation of RMB and the aluminum enterprises meeting to discuss the production reduction, purchase and storage event, breaking through the peak in November, and the rising model was MWW ⑴ 0e To 1680 yuan/ton. However, the international aluminum price fluctuated between 1460-1530 US dollars/ton due to the sharp increase in China's aluminum exports, which was significantly weaker than the domestic market. The ratio of Shanghai to Shanghai rose sharply from 6.11 on November 11, 2016 to 7.18 on December 11

in the fourth quarter of 2016, the domestic aluminum price was tight due to the low inventory problem caused by the new deal of transportation vehicles. Due to the transportation bottleneck, the domestic aluminum price rose sharply, raising the Shanghai lunbi to open the import window. Because China is still a large producer of electrolytic aluminum, the output is enough to support domestic consumption and even export aluminum materials to make up for the gap of electrolytic aluminum abroad, Therefore, once the import window is opened, it is a good time to do positive arbitrage

exchange rate impact

first, exchange rate fluctuations. If the exchange rate fluctuates, the equilibrium ratio must be redefined, and exchange rate fluctuations will bring more uncertainty to this arbitrage behavior. For example, the intensification of two-way fluctuations in the RMB exchange rate will increase the exchange rate risk of cross market arbitrage

the impact path of RMB exchange rate fluctuations on cross market arbitrage is RMB depreciation, increase in import costs, move up the upper limit of import specific price, and strong domestic copper price, which leads to the opening of import arbitrage window, which is conducive to the increase of import volume. In the second half of 2018, with the rise of the US dollar index and the acceleration of the depreciation of the RMB exchange rate, the Shanghai London ratio of non-ferrous metals rose in an all-round way, among which the Shanghai London ratio of copper rose all the way, from a large loss in imports to opening the window of import arbitrage

the second is the exchange rate spread. In the cross market arbitrage, there are two pricing currencies: USD for the external market and RMB for the domestic market. At present, the spot ratio of copper is between 7-8, while the exchange rate of RMB against the US dollar fluctuates between 6.3-6.9. We take the median value of 7.5 and 6.6, and the difference between them is 0.9, which is the exchange rate spread. Assuming that the LME copper price fluctuates by $100 and the price comparison is calculated at 7.5, the domestic copper price should fluctuate by 750 yuan. However, from the perspective of settlement, if the exchange rate of RMB against the US dollar is 6.6, the copper price fluctuation in the LME market is equivalent to only 660 yuan, of which there is an exchange rate spread of 90 yuan. This will affect our arbitrage position. A more feasible method is to treat the number of internal and external arbitrage positions differently according to the arbitrage direction and the trend of copper price, so as to eliminate the impact of exchange rate difference

tax rate impact

the impact of tax rate adjustment includes the adjustment of value-added tax rate and import and export tariffs

in terms of import tariff, it was announced at the end of 2017 that the import tariff of nickel increased from 1% to 2% from January 1, 2018, resulting in a 1% increase in the cost of long-term import nickel price. Therefore, the import window was opened, and a large number of enterprises rushed to import refined nickel in December 2017

in terms of value-added tax, on March 28, 2018, the executive meeting of the State Council decided to reduce the value-added tax rate of manufacturing and other industries from 17% to 16% from May 1, 2018. There was a significant increase in the import of refined zinc in May, but this was also related to the oscillation of Shanghai London ratio and the opening of the import arbitrage window in May. Keeping other conditions unchanged, the decline of value-added tax rate is conducive to the decline of non-ferrous metals in the Shanghai London ratio in the short term, both from the perspective of export and import. From the perspective of internal and external arbitrage, it is conducive to buying foreign arbitrage and selling domestic arbitrage, and shorting the Shanghai London ratio. Due to the low impact of value-added tax, the reduction of value-added tax has little impact on the price comparison. It is not recommended to short the Shanghai London ratio just because of the reduction of value-added tax

impact of premium structure

in cross market arbitrage, if the premium structure of the two markets is different, it may affect the overall income with the shift of arbitrage positions

if the structure of premium and discount in the two markets is completely inconsistent, cross market arbitrage over time, the position transfer of the two arbitrage positions will suffer losses or enjoy additional position transfer gains according to different circumstances. For example, in April, 2018, the metal zinc LME market showed a structure of near low and far high, while the SHFE market was still a structure of near high and far low. Buying domestic and foreign reverse arbitrage can enjoy additional position shifting income in addition to the price difference income between the two places

if the structure of premium and discount in the two markets is the same, but the range of premium and discount is different, it will also have an impact on the arbitrage effect. For example, the copper market maintains a positive market structure, but the price difference between the two markets is not the same. Generally speaking, if the price difference between LME copper contracts is relatively smaller than that of Shanghai copper, and you hold an arbitrage position for 2 months when you buy the positive set of LME and sell SHFE, the amount of loss due to position shifting in LME is less than the income earned due to position shifting in China, and the overall arbitrage position can obtain additional profits due to position shifting

risk tip

price difference does not return risk

generally speaking, when the Shanghai Lun price comparison is close to the upper and lower limits of the aforementioned arbitrage range, or exceeds the normal fluctuation range, from the perspective of statistical arbitrage, it is abnormal that the price comparison is too high or too low, and there is a need for regression. Generally, positive arbitrage can be carried out when it is close to the upper limit of the fluctuation range, while reverse arbitrage can be carried out when it is close to the lower limit of the range. However, it does not rule out the risk that the price difference will not be repaired or even break through the arbitrage range significantly due to logistics, policies or market sentiment

foreign exchange control risk

when the price changes to the unfavorable direction of the position, if the remittance channel is not smooth, it will be forced to exchange high prices for black market dollars, and even lead to the risk that the position will be forcibly flattened

time exposure risk

although night trading is currently carried out in the domestic market, due to the impact of holidays and certain differences in the trading time between internal and external markets, sometimes orders cannot be placed at the same time, which inevitably leads to time exposure and increases the operational risk of cross market arbitrage

other unforeseen circumstances

the delay of delivery, the adjustment of customs tax base, the delay of letter of credit, etc. may make arbitrage activities passive

the main factors that affect cross market arbitrage are fundamentals, policy, exchange rate, tax rate and contract premium structure, but other factors, such as inventory, logistics and transportation and seasonal factors, also deserve our attention. Research and Prospect of raw plastic modified concrete in the process of considering cross market arbitrage strategy, various factors may have cross effects, so it needs to be comprehensively considered. Generally speaking, the varieties with smooth trade flow and stronger correlation between the price trends of the two places have relatively small risk of positive cross market arbitrage

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