Statistical Arbitrage Trading Strategy | Quantra courses | MCX certified course


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

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