The Study Of Domestic Virtual Steel Mill Inter-commodity Futures Arbitrage

Futures is a kind of standardized contract of various commodities,which not only provides a tool for a number of entity companies,but also enrich the investment choices for investors.Inter-commodity arbitrage hedge is one of the most popular investment choices.It applies the relation of different futures,such as substitute and upstream and downstream industry chain.By seeking for a reasonable range of different futures spreads,arbitrage occurs when the spreads fluctuate abnormally.Among them,steel,iron ore and coke comprise a complete steel industry chain,which means a positive correlation and potential arbitrage hedge opportunities.In the production process,a ton of steel output is made of 1.6 tons of iron ore and 0.5 tons of coke input as well as processing fees,interest costs and other expenses.We can determine the profits of steel mills if the material costs of iron ore and coke and related expenses are subtracted from the steel prices.As the processing costs and interests are relatively fixed,the margin is therefore greatly affected by raw materials.If the steel profit is too high,it means that the steel price is too high and the price of raw materials is too low.Therefore,we can sell steel and buy raw materials.If steel profit is too low,it means the price of steel is too low and the raw materials are too expensive,then we can buy steel and sell raw materials to make a profit.If investors utilize this relation to participate in the arbitrage hedge in futures market,as if they opened a virtual steel mills.Based on the input-output analysis in manufacturing process and mathematical statistics methods,such as cointegration test and error correction model(ECM),to find the relationship between the three products'prices and determine a reasonable profit margin of steel.We set two lines up and down 90%confidence interval range around the average level.If the spread goes from the bottom over the upper limit,there is a chance to short the steel profits,then you can sell steel futures in the futures market,while buying coke and iron ore futures price,waiting spread to return to a reasonable level.When spread return to the reasonable level,investors should do the opposite operation.When the spread drops from the top down over the lower limit,it means that there are more margins and investors in the futures market to buy steel futures and sell iron ore and coke,waiting for the spread returning to a reasonable level.Based on the practical experience and mathematical statistics research,we design an arbitrage model of "virtual steel mill" and use the data of 2016 to test the rationality and profitability of the model.The result shows that the model has a good profitability and a smaller retracement rate and harvests profits for investors.However,a variety of risks,such as market risk,transaction risk and financial risk,and potential problems of the models,such as transaction cost,deviation,if we directly use the model to trade,it may well bring about many problems.The investors are supposed to improve and perfect the model so as to make it more feasible for the current situation of the futures market and the personal needs of investors.