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FX futures against the cash
- Thread starter torchiegore
- Start date
I agree what does buying a call and selling another DIFFERENT call with a different expiration have to do with arbitrage, that's just taking on a position, vol blows out in two separate directions on each month and I see nothing that is risk free there...
Also when you say should cancel, I don't think in basis trading anything is guaranteed, they are after all two separate securities, arbitrage requires two securities to be the same.
Also when you say should cancel, I don't think in basis trading anything is guaranteed, they are after all two separate securities, arbitrage requires two securities to be the same.
Quote from r4r:
basis trading
An arbitrage operation in which an investor takes a long position in one type of security and a short position in a similar security in an attempt to profit from a change in the basis between the two securities. For example, an investor might purchase a call with an April expiration and simultaneously sell short a call with a different expiration or strike price on the same stock. The investor expects that the values of the two positions will change over time such that a profit will ensue. Basis trading is undertaken when the investor feels one security is priced too high or too low relative to the price of another security. Because of this, the profit on one side of the trade should more than cancel out the loss on the opposite side of the trade. Basis trading may involve an index or group of securities as well as individual securities. Also called relationship trading.
At least post the link you cut and pasted this from!
http://financial-dictionary.thefreedictionary.com/Basis+Trading
That's a big load of bollox... Basis trading is NOT arbitrage. It's almost impossible to find actual arbitrage in modern mkts, no matter what silly definitions Investopedia or whoever else publishes.Quote from r4r:
regardless of the erroneous definition the point was that basis trading is a form of arbitrage.
And I have to say, this new "relationship trading" term the first link mentions really cracks me up. Sounds more like something Match.com would get involved in, if you ask me.
costless? nothing is free. doesn't matter if you're db, ubs, bcly's, or a retail trader in his undies, you're going to be financing your trades one way or the other. arb is no different.Quote from Martinghoul:
Arbitrage, to me, implies availability of costless risk-free profit. FX fwd (or futures) vs FX spot is only risk-free (to a practical extent), if you're able to fund your spot positions better than what's implied by the fwd mkt. There are some interesting recent examples of how this "arb" can go horribly wrong.
also, if i may be as pretentious as a previous poster... the 'risk-free' definition is 'so abused'. you always have risk. the purer the arb, the more your risk moves away from structural (mispricing model), to mechanics (IT, feeds, middleware, etc.). risk doesn't go away, it just gets transferred.
in reality, arbitrage, is simply capturing 'near' risk-less alpha from diverging relative valuations. these can be as linear as same issue inter-market valuations, to loose synthetic basket vs index valuations. the looser the coupling: the greater the alpha, the greater the risk; the tighter the coupling: the smaller the alpha, the lower the risk. pick your poison.
When I said 'costless' I meant it primarily to apply to options (to exclude strategies that have a strictly non-negative payoff, such as butterflies, but require upfront payment of premium)Quote from propseeker:
costless? nothing is free. doesn't matter if you're db, ubs, bcly's, or a retail trader in his undies, you're going to be financing your trades one way or the other. arb is no different.
also, if i may be as pretentious as a previous poster... the 'risk-free' definition is 'so abused'. you always have risk. the purer the arb, the more your risk moves away from structural (mispricing model), to mechanics (IT, feeds, middleware, etc.). risk doesn't go away, it just gets transferred.
in reality, arbitrage, is simply capturing 'near' risk-less alpha from diverging relative valuations. these can be as linear as same issue inter-market valuations, to loose synthetic basket vs index valuations. the looser the coupling: the greater the alpha, the greater the risk; the tighter the coupling: the smaller the alpha, the lower the risk. pick your poison.
The point is that you and I are, effectively, in agreement. The way I define the term "arbitrage" in practice is that it's a trade that cannot blow you up on any time horizon (i.e. non-negative payoff at every point in its lifetime). All I am trying to say is that, given that in practice your capital is finite and other restrictions, presence of "arbitrage" is vanishingly rare in the mkts. Everything is risky and can kill you.
The reason I like to stress that is that there's a lot of academic conclusions out there based on "no arbitrage" arguments, which assume infinite capital/balance sheet. That's a pet peeve of mine, especially after 2008.
Wow, what an enlightening discussion. None of you managed to answer the guys question.
Yes cash-futures arbitrage does exist in the FX space. No there is no such thing as pure arb opportunities as defined by investopedia, but High Frequency Trading Firms like mine manage to do pretty damn well on 1 pip / several microsecond trades.
I don't need to list the names of firms that do this. If they hire Ph.d's from MIT and spend 30 Million on infrastructure then they probably do some form of c/f arb type strats. Its almost 2012 now and we're still making money off this stuff.
Yes cash-futures arbitrage does exist in the FX space. No there is no such thing as pure arb opportunities as defined by investopedia, but High Frequency Trading Firms like mine manage to do pretty damn well on 1 pip / several microsecond trades.
I don't need to list the names of firms that do this. If they hire Ph.d's from MIT and spend 30 Million on infrastructure then they probably do some form of c/f arb type strats. Its almost 2012 now and we're still making money off this stuff.