Geographical Arbitraging
How would you do it on paper and how to make money if some contract is cheap?
How would you do it on paper and how to make money if some contract is cheap?
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Question 1 If the coal you buy in South Africa can be delivered on the Rotterdam contract AND the spot price of South African + shipping/insurance/FX rate is still less than the Rotterdam price you would buy the South African coal and sell the Rotterdam futures contract. You would be locking in a geographical arb and you intend to deliver physical so price movements wouldn't matter. You can't really do this trade with just paper trading because of the different factors that affect each market--you could do it, but then it would be a relative value spread trade between the Rotterdam and South African coal price. The value of the first trade is that you are locking in your buying and selling price to make a guaranteed profit.
Question 2 If Coal in Rotterdam were cheap, I would ask compared to what? If it is between another coal then you would look to buy Rotterdam and sell the more expensive coal--like the relative value spread trade above. I assume the question is referring to the spread between the different monthly contracts. In which case I would buy the front month and sell a month further in the future with the expectation that that spread should compress as time passes.
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