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Unexpectedly raise rates

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Category: Futures Trading

For instance, let's suppose the British government unexpectedly raises rates of interest by .5%. The cash Footsie slumps in minutes by 1% to 4,950, however the futures contract, which can often be traded quicker and more cheaply than the cash contract, plummets by 2% to 4,949 - right here is your arbitrage alternative : you buy the future contract and promote the cash concurrently, as a result of the unfold between the cash value and the long run price doesn't signify fair worth - eventually the cash will fall further and/or the longer term contract will rise, rising the spread between the 2, regardless of the average worth of the 2 contracts.

And of course it really works the opposite method - too huge a variety is a chance to bet on it narrowing sooner or later.  Generally speaking, the more liquid the market, the less arbitrage opportunities arise.  You possibly can see, nonetheless, how a lot less dangerous this kind of trading is. It follows that the rewards are equally reduced.

Arbitrage buying and selling doesn't must be confined to cash versus futures: you can arbitrage just about anything. For instance, it's possible you'll decide that the Dow has a bleak future, whereas the Nikkei is about to soar (I quote this one as a result of it occurs to be a fashionable belief at this second in time).

So you may sell the Dow and concurrently purchase the Nikkei. The consequence will likely be a type of hedging that will cut back the volatility of your account steadiness in comparison with one-sided trading.

But a phrase of warning : different markets function in different time zones, and when one market is closed you might be totally uncovered to the one-sided motion of the other. In the case of the Nikkei, for example, you will have one-sided exposure to the Dow for about half of each 24-hour day.

Furthermore, arbitraging two completely different markets like that is far riskier than arbitraging a money-futures spread, which all the time finally returns to fair worth - the Dow and the Nikkei could go fully the opposite method, truly amplifying your threat compared to one-sided buying and selling
U.S. Government Required Disclaimer - Commodity Futures Trading Commission

Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results. CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN. All trades, patterns, charts, systems, etc., discussed in this advertisement and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author and do not necessarily reflect those of the publisher or Tradewins.