HKEx small metal futures contract-investment arbitrage

Legend has it that in ancient Rome, a stranger went to see the Roman Emperor di Tiberius (Tiberius), and offered a metal cup. This cup shines like silver, but it is light in weight. Its material comes from the new metal extracted by the stranger from the clay.

Huang di expressed his gratitude on the surface, but he was very upset in his heart. He was afraid that this dazzling new metal would devalue his gold and silver treasure, so he ordered that the inventor be permanently imprisoned in the celestial prison. Since then, no one has ever thought of refining this "dangerous metal", which is aluminum.

Before the 19th century, aluminum was considered to be a rare precious metal, which was much more expensive than gold. With the progress of smelting process, aluminum has gradually entered the homes of ordinary people.

Aluminum is an important member of the family of non-ferrous metals. Non-ferrous metal industry is the cornerstone industry of national economic development, aviation, aerospace, automobile, machinery manufacturing, power, communications, construction, household appliances and other industries are based on non-ferrous metal materials. Non-ferrous metals industry is one of the barometers of the development of our national economy.

(1) A V-shaped rebound in the price of non-ferrous metals in 2020

Since the beginning of this year, the spread of the novel coronavirus epidemic has had a tremendous impact on the global financial and commodity markets. There have been sharp price fluctuations in many varieties of non-ferrous metals.

In March this year, affected by the epidemic, people were pessimistic about the future economic outlook. The RMB aluminum futures 2009 contract on the Hong Kong Stock Exchange fell all the way from about 12500 yuan / ton at the beginning of the year to 10230 yuan / ton at the beginning of April. As the epidemic was brought under control in China, aluminum prices quickly rebounded to 11800 yuan per ton in mid-July.

The price trend of RMB aluminum futures 2009 contract on the Hong Kong Stock Exchange, data from the website of the Hong Kong Stock Exchange

In the first half of the year, aluminum price achieved a V-shaped reversal, aluminum futures contract price volatility is huge, but at the same time contains a wealth of investment opportunities.

(2) small metal futures contracts of the HKEx-good investment arbitrage tools

Investors can invest and arbitrage through the non-ferrous metal futures contracts listed on the exchange.

At present, London Metal Exchange (LME) is the largest non-ferrous metals exchange in the world, with a wide range of listed non-ferrous metal contracts and large trading scale. The trading volume of non-ferrous metal futures contracts on the Shanghai Futures Exchange ("Shanghai Futures Exchange") is also among the highest in the world.

Investors can also choose small London metal futures contracts ("small metal contracts") listed on the Hong Kong Stock Exchange to look for investment and arbitrage opportunities.

In 2012, the Hong Kong Stock Exchange acquired LME. To expand the use of LME trading prices in Asia, particularly in mainland China, the Hong Kong Stock Exchange launched six LME-based London metal futures small contracts in 2014 and 2015, including aluminium, zinc, copper and nickel, tin and lead. In August 2019, the Hong Kong Stock Exchange launched six similar metal futures contracts denominated in US dollars.

Details of RMB aluminum futures contract of HKEx (extracted from the website of HKEx)

The small metal futures contracts listed on the Hong Kong Stock Exchange have the following characteristics:

1) the contract is small and easy to hedge

2) Cash delivery

3) double currency pricing, you can look for arbitrage opportunities

The scale of the small metal futures contract is relatively small, each contract unit is divided into 1 ton / sheet and 5 tons / piece, and the nominal value of the contract is 50, 000-100000 yuan, which can better meet the needs of ordinary investors.

Small metal futures small contracts are settled on a monthly basis and delivered in cash, saving delivery fees for investors and reducing transaction costs.

In addition to using US dollars, small metal contracts can also be quoted in RMB, which makes RMB investors do not have to involve the issue of foreign exchange in the process of trading, and enterprises can also avoid the risk caused by fluctuations in the exchange rate of RMB against the US dollar.

Small metal futures contracts not only facilitate investment, but also facilitate arbitrage trading with related contracts of LME and Shanghai Futures Exchange.

There are a wide range of arbitrage opportunities for small metal futures on the HKEx, mainly covering the following categories:

1) the cross-market arbitrage opportunities of the same commodity contracts in different markets;

2) the opportunity of cash arbitrage between commodity futures and spot market;

3) intertemporal arbitrage opportunities between futures contracts in different maturity months;

Today we focus on cross-market arbitrage opportunities for non-ferrous metals.

Cross-market arbitrage means that investors make use of the contract price differences in different markets to buy contracts with relatively low prices and sell contracts with relatively high prices at the same time, and gain profits by closing their positions after the prices of the two markets converge.

The main types of cross-market arbitrage involving non-ferrous metals include LME non-ferrous metals contracts, Shanghai Futures Exchange non-ferrous metals contracts and Hong Kong Exchange US dollar RMB dual currency small metal contracts.

Contracts and specifications

London Metal Exchange

Shanghai Futures Exchange

Hong Kong Stock Exchange

Copper

25 tons

5 tons

5 tons

Aluminium

25 tons

5 tons

5 tons

Zinc

25 tons

5 tons

5 tons

Lead

25 tons

5 tons

5 tons

Nickel

6 tons

1 ton

1 ton

Tin

5 tons

1 ton

1 ton

Specifications of non-ferrous metal futures contracts in the three major exchanges

At present, the specifications of non-ferrous metal contracts listed by LME are larger than those of Shanghai Futures Exchange and Hong Kong Stock Exchange, and unit conversion is needed for cross-market arbitrage between Shanghai Futures Exchange and LME.

The small metal futures contract of the Hong Kong Stock Exchange is consistent with the contract specifications of the Shanghai Futures Exchange in China, and can directly correspond at 1:1 when carrying out internal and external arbitrage. In addition, the small metal futures contracts priced in RMB on the Hong Kong Stock Exchange are in the same currency as those on the Shanghai Futures Exchange, making it easier to arbitrage.

(3) case analysis of cross-market arbitrage

Take aluminum as an example, the price of aluminum abroad has been discounted at home for a long time. The spread of aluminum contracts between the Shanghai Futures Exchange and the Hong Kong Stock Exchange usually remains in a stable range. If the price difference at home and abroad widens significantly due to the impact of unexpected events, cross-market arbitrage can be carried out (sell high and buy low).

As shown in the figure below, we list the closing prices of aluminum futures 2009 contracts on the Shanghai Futures Exchange and the Hong Kong Stock Exchange from the beginning of the year to the end of June.

time

Shanghai Futures Exchange

Hong Kong Stock Exchange

Price difference (in RMB)

2020-1-2

13890

12505

1385

2020-3-30

11670

10735

nine hundred and thirty five

2020-6-30

13645

11460

2185

The data are from the websites of Shanghai Futures Exchange and Hong Kong Stock Exchange respectively.

It can be seen that from January 2 to March 30 of the year, the price difference of aluminum contracts between the Shanghai Futures Exchange and the Hong Kong Stock Exchange converged from 1385 yuan per ton to 935 yuan per tonne, and then widened to 2185 yuan per ton on June 30, three months later.

Judging from the historical spread, the spread of 935 yuan at the end of March is at an all-time low. If arbitrageurs enter the market at this time to make long spreads (long Shanghai Futures Exchange contracts and short Hong Kong Exchange contracts), they can enjoy the benefits of widening price spreads later.

It should be noted that cross-market arbitrage is mainly based on historical prices and statistical arbitrage, after entering the market, we should also pay attention to the market risk.

As shown in the picture, both the HKEx aluminum futures contract (above) and the Shanghai Futures Exchange contract (bottom) experienced a V-shaped reversal in the first half of the year (data from the HKEx website and Sina respectively)

(5) General introduction

There is a wide range of arbitrage opportunities between Hong Kong Exchange small metal futures contracts denominated in US dollars and RMB, Shanghai Futures Exchange futures contracts denominated in RMB and US dollar-denominated LME futures contracts, which deserve investors' attention.

The launch of small metal futures contracts on the Hong Kong Stock Exchange has built a better global commodity trading platform for customers in the Asia-Pacific region, while providing a convenient channel for domestic investors to participate in overseas non-ferrous metals investment.

Make good use of derivatives and invest wisely!