Arbitrage Strategies

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Arbitrage Strategies

Arbitrage strategies in derivatives involve taking advantage of price inefficiencies between two or more markets or assets. Here are some common types of arbitrage strategies:

  1. Cash-and-carry arbitrage: This involves buying an asset in the spot market and selling a futures contract on the same asset. The profit is made by the difference between the purchase price and the futures price, plus any carrying costs.
  2. Reverse cash-and-carry arbitrage: This involves buying a futures contract on an asset and selling the asset in the spot market. The profit is made by the difference between the futures price and the sale price, minus any carrying costs.
  3. Convergence arbitrage: This involves taking opposite positions in two different markets that are related to the same underlying asset. For example, an investor may buy an undervalued futures contract and short sell the corresponding stock in the spot market.
  4. Calendar spread arbitrage: This involves taking opposite positions in two futures contracts on the same underlying asset but with different expiration dates. The profit is made by the difference between the two contract prices.
  5. Inter-commodity spread arbitrage: This involves taking opposite positions in futures contracts on two different but related assets. For example, an investor may buy crude oil futures and sell heating oil futures if the price of crude oil is expected to increase more than the price of heating oil.
  6. Inter-exchange arbitrage: This involves taking advantage of price differences between the same asset traded on different exchanges. For example, an investor may buy an undervalued futures contract on the Chicago Mercantile Exchange and sell the corresponding contract on the Intercontinental Exchange.

These are just a few examples of the many arbitrage strategies used in derivatives trading. Successful arbitrageurs must carefully monitor market movements and quickly execute trades in order to take advantage of small price discrepancies before they disappear.

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