What Are the Most Common Arbitrage Strategies?

Arbitrage strategy is a strategy that uses the opportunity of temporarily inconsistent prices and yields of certain financial products to obtain returns in the financial market. When this price change produces a risk-free return, it is called a risk-free arbitrage strategy. Such arbitrage opportunities are rare and disappear once they appear. The inconsistency between the price of some financial products and the rate of return is not short-lived. At this time, the risk of obtaining returns through this opportunity is that the price or rate of return may not change in the expected direction. For hedge fund managers, this strategy for obtaining returns may not be a low-risk trading strategy, but a risk arbitrage strategy, which may return or converge the price or return deviation to a historical equilibrium level . ^[1]

Arbitrage strategy

Different delivery month contracts traded at the same time are based on the same underlying index. Generally speaking, different

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Because arbitrage strategies are unstable, highly liquid, change fast, and have certain risks. The intertemporal arbitrage strategy is a transaction for the spread between different stock index futures contracts. Considering the uncertainty of the spread operation, investors need to predict the operation of the spread and spread of the stock index futures contracts with different expiration months. Therefore, this arbitrage The form is not risk-free arbitrage. The direction of the spread operation is consistent with the investor's forecast direction, then the intertemporal arbitrage transaction can be profitable, otherwise it will lose money, so intertemporal arbitrage is speculative.

The intertemporal arbitrage strategy has risks, but the related risks are far less than purely speculative trading. Because the intertemporal arbitrage strategy is to use the spread of futures contracts in different expiration months to buy futures contracts that expire in one month and sell futures contracts that expire in another month, that is, intertemporal arbitrage holds the opposite direction, Two contracts of the same quantity. In estimating the intertemporal arbitrage boundary, there are some parameters that cannot be accurately set, which will cause certain risks to arbitrage. For investors with less risk tolerance, it is recommended to carry out arbitrage after the spread reaches a certain level.

Futures implement a margin system. If the price changes in a direction that is not conducive to investors, additional margin will be required if the margin is insufficient. If the margin cannot be paid on time, it will face the risk of forced liquidation. Once this happens, arbitrage will be greatly affected and even fail. It is with this in mind that in the above arbitrage strategy, we have relatively large futures margin, but we still cannot guarantee that there may be insufficient margin when the price fluctuates sharply.