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Statistical Arbitrage Trading Strategy | Quantra courses | MCX certified course - YouTube
Channel: Quantra
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In this video,
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we will look at
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some of the commonly used
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arbitrage strategies in trading commodities.
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In the Indian commodities markets,
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arbitrage opportunities are commonly found
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in these three instances: First,
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by taking advantage of the
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price difference between the futures
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and spot market.
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We will refer to this
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as Cash and Carry strategy.
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Second, by capitalizing on the
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price difference between two contracts
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in the futures market.
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We will call this Futures
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Calendar Spread.
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And lastly, two co-integrated commodities
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can be speculated according to
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market condition and historical data.
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This will be called Inter-commodity
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strategy which is also a
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type of a Stat Arb
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strategy.
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Let us now understand each
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of these three strategies in
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detail.
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Cash and carry arbitrage is
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used when there is a
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price disparity between the future
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and spot prices of a
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particular commodity.
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In this strategy the arbitrageur
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trades in both the spot
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market and the futures market.
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Let us consider an example.
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A commodity trader buys a
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commodity for INR 100 in
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the spot market.
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Assume the holding cost that
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is storage cost plus the
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risk-free rate to be INR
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10 for a duration of
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6 months.
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If he manages to initiate
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a short position in the
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commodity futures for INR 120
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where expiry of the contract
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is 6 months in the
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future, he can deliver the
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stored commodity and earn a
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risk-free profit of INR 10.
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This is the cash and
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carry arbitrage where the trader
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carries the commodity into the
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future and cashes out via
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the futures contract.
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Futures Calendar Spread, also called
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futures time spread or futures
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horizontal spread, involves the simultaneous
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purchase and sale of futures
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contracts on the same underlying
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asset expiring on different dates.
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This arbitrage strategy is modelled
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to profit from the difference
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in rate of movement of
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prices between near term and
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far term futures contracts.
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Future Calendar Spreads which involve
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going long on near term
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futures contracts and short on
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far term futures contracts are
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known as Bull Spreads.
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Bear Spreads are those strategies
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when the trader shorts the
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near term futures contract and
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goes long on the far-term
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futures contract.
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Lastly, let's discuss the Inter-commodity
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Arbitrage.
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By considering different commodities on
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the same exchange having same
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cash flow or in the
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same category, there is a
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possibility for creating an inter-commodity
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arbitrage.
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Suppose the price of Aluminum
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in the February 2018 futures
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contract is around INR 140
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and the price of Zinc
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in the February 2018 futures
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contract is around 225.
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If the arbitrageur thinks that
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the price difference will increase,
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he can sell the Aluminium
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February contract and buy the
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Zinc February contract.
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If it decreases, he can
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buy the Aluminium February contract
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and sell the Zinc February
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contract.
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To recap, we learnt about
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three types of arbitrage strategies
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commonly used in commodities markets.
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These are Cash and Carry,
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Futures Calendar Spread and Inter-commodity.
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