It is sometimes seen that many traders, even with 5 years of experience in financial markets such as Forex and the stock market, despite attending Forex training courses, are still unaware of the concept called arbitrage and do not know exactly what arbitrage is and how to deal with it. کرد. The topic we want to address in this article is this fascinating concept that, due to its slight complexity, is rarely approached by anyone, but it can be used well to earn dollars in the financial markets.
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Arbitrage or hedge futures and spots
Let’s talk about the basics first. Hedging means having a trading position in the futures market as opposed to the position of the trader in the cash market, and the purpose of his presence in the futures market is to reduce or limit the risks arising from price changes.
Hedging is a two-pronged process:
- If a hedgehog intends to buy a commodity in the cash market at a later date, he will reduce or limit his purchase price risk by entering into futures contracts.
- If the hedgehog intends to sell a commodity in the cash market for the future, he is now selling the futures contract, at which point he has reduced or limited his selling price risk by selling the futures contract.
What is the purpose of the hedging strategy?
- Preventing and protecting against rising raw material costs
- Replacing inventory at a lower price
- Support the sale of products without backing in the future
Therefore, the act of hedging in order to stand and resist the price increase in the cash market of a commodity that has recently been sold at a certain price but has not yet been bought like that commodity. It is common practice to sell a commodity at the current agreed price between exporters and importers and deliver it in the future. If we do not have a product yet, the delivery of that product in the future normally has no executive guarantee. But the same operation is being carried out in the stock exchange with a full guarantee.
To better illustrate arbitrage in financial markets, let us give an example. Isfahan Steel Factory has decided to sell hot rolled sheets for delivery in a few months, but currently does not have enough raw materials to produce hot rolled sheets and also does not know how much the raw materials will cost him in the future. To ensure and get rid of price increases, this factory can refer to the metal exchange and buy as many futures contracts as it needs and guarantee the selling price of its future hot plate at the desired price.
If the steel plant buys raw materials without buying futures contracts in the stock market, it will be vulnerable due to the increase in raw material prices, but by trading futures contracts to the extent of its needs in the stock market, it actually reduces the effect of rising raw material prices and purchase costs. Give. This is called arbitrage.
Summary of arbitrage procedures for trading in financial markets
Futures trading means buying a product for delivery on a specific date in the future. For example, you buy 1 lot of gold for delivery in the next 3 months. In a Forex brokerage it is not possible to physically deliver the goods and only cash settlement on the delivery date is possible.
How to trade on futures is like spot. As we explained in the ForexReviewGroup Forex tutorial, you can set a profit and loss limit and close the position whenever you want. The amount of profit and loss is determined exactly like the spot. The important question that arises is what exactly is the benefit of futures trading in Forex. Futures have two major advantages:
- Futures trades are used to reduce the risk of spot trades. This is especially true for industry owners who want to keep costs down.
- Hedge futures and spot trades in order to take advantage of their potential profit. This case is for traders.
Sample arbitrage in Forex for profit
The following is an example of Forex arbitrage for profit. As you can see, the price of spot and gold futures are about 600 pips apart. If you look at the prices shown in the charts, you will see that the futures price is higher than the spot. So we buy futures for cell and spot. Because the two have to come together. Just as easily!
Nine days after taking the position, the gap between Spot and Futures is almost zero and we take advantage of this opportunity by about 500 pips. (Of course, 100 pips have been paid for the commission and spread.)
Note that gold futures charts are for 2 months and are offered in 6 charts per year. Arbitrage usually occurs at the beginning of a new chart opening. Arbitrage may occur several times in a two-month chart and result!
Arbitrage also occurs in currencies. Currency and futures charts are expanded every 3 months and a new chart is created. On the other hand, arbitrage in currencies results much faster than gold, sometimes up to 24 hours. Of course, according to experience, these trading opportunities in the gold chart are almost 100% accurate, you say no, try it yourself!
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