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Study On The Risks In SPIF Spot-futures Arbitrage

Posted on:2014-03-09Degree:MasterType:Thesis
Country:ChinaCandidate:D ZhangFull Text:PDF
GTID:2309330425463664Subject:Finance
Abstract/Summary:PDF Full Text Request
The launch of share price index futures (SPIF) on China Financial Futures Exchange on April16,2010represented a milestone in financial market of China. As a major financial derivative in China market, SPIF has been booming during the past years, and can match the mature commodity futures instruments in terms of trading amount now, although it is still at its early stage.Currently, the participants of SPIF can be divided into hedger,arbitrager and speculator according to the aim of investment. In Chinese market, hedging is dominant as it is the major defensive instrument for institutional investors to hedge systematical risk. Considering the possible high return, speculation is the most profitable and extremely risky transaction. Due to the flexible operation mode, stable return and manageable risk, arbitrage has become a powerful active instrument for more and more investors.In theory, SPIF should follow the fluctuation trend of spot index consistently, but they deviate frequently. When the deviation reaches a considerable degree, the opportunity of arbitraging occurs. The arbitragers make use of the mispricing and then make profits when the spread converges. Generally speaking, SPIF arbitrage is made up of calendar spread arbitrage, spot-futures arbitrage, inter-product arbitrage and inter-market arbitrage. Spot-futures arbitrage is a kind of risk-free strategy. In other words, the volatility of stock market price has no direct impact on the profit of spot-futures arbitrage, which consists of both spot and futures positions. This article investigates spot-futures arbitrage only as it is the major and mature method of arbitrage in China market. Although the risk of spot-futures arbitrage is less than any other arbitrages, it is not absolutely risk-free in real world. It will involve risks caused by market impact cost, tracking error, dividend, liquidity, margin call and so on. This article will elaborate the impact of these risks on spot-futures arbitrage, and shed light on how to anticipate and control these risks by means of analyzing several typical cases.
Keywords/Search Tags:Share Price Index Futures, Hedging, Spot-futures arbitrage, Risk
PDF Full Text Request
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