China's Copper Intercity Arbitrage

Among the current Chinese futures products, the arbitrage of metal is the mostmature. It is strongly linked to the booming development of the Chinese metalindustry, the metal exchange and the global metal markets. Copper is rich deficient inChina with free tariffs also it’s fully market-oriented in both domestic and foreignmarkets, which makes copper the most appropriate product for arbitrageThis passage mainly studies the cross-markets arbitrage between SHFE andLME’s copper contracts. Firstly we summarize the related theories on cross-marketsarbitrage. Secondly, we studied how the financial crisis factor influenced the spread.The passage makes a statistics of the spread fluctuation between December2006andJanuary2012. We find that the spread becomes narrow in generally while widenedafter the financial crisis in2008midterm. The author attributes the situation to thedevelopment of markets, the RMB exchange rate and the change of relevantsupply-demand relationship after the crisis.Then we analyzed the possibilities of two kinds of cross-market arbitrage: one isthe current period arbitrage which based on the physical delivery, the other one is thearbitrage in hedging. We studied the detailed operation of the trading and make acooperation of the two types.The futures industry is high risky, we also studied the limits of arbitrage. Wesummarize the types of the risk of futures industry and analyze source of the risk fromboth macroscopical financial environment and the microscopic condtions where therisk originates.