The complete arbitrage deskbook [1 ed.] 0071359958, 9780071359955, 9780071381246
The Complete Arbitrage Deskbook explains every aspect of the types, instruments, trading practices, and opportunities of
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THE COMPLETE ARBITRAGE DESKBOOK
Other Titles in the Irwin Library of Investment and Finance Quantitative Business Valuation
High-Yield Bonds Pricing and Managing Exotic and Hybrid Options
Convertible Securities
Risk Management and Financial Derivatives
The Handbook of Credit Derivatives ! ! " ## Asset Allocation, 2nd edition $# " Active Portfolio Management, 2nd edition $ " $ % Equity Management & % ' ( The Hedge Fund Handbook ) '( Implementing Credit Derivatives * + Pricing, Hedging, and Trading Exotic Options * + Valuing a Business, 4th edition $ $ $
Valuing Small Business and Professional Practices, 3rd edition $ $ $
The Handbook of Advanced Business Valuation $ ! $ $
Valuing Intangible Assets $ ! $ $
Managing Financial Risk Global Investment Risk Management ,- .
THE COMPLETE ARBITRAGE DESKBOOK
,/+, $,,$$,
New York Chicago San Francisco Lisbon London Madrid Mexico City Milan New Delhi San Juan Seoul Singapore Sydney Toronto
McGraw-Hill
abc
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-138124-4 The material in this eBook also appears in the print version of this title: 0-07-135995-8
All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at [email protected] or (212) 904-4069.
TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works based upon, transmit, distribute, disseminate, sell, publish or sublicense the work or any part of it without McGraw-Hill’s prior consent. You may use the work for your own noncommercial and personal use; any other use of the work is strictly prohibited. Your right to use the work may be terminated if you fail to comply with these terms. THE WORK IS PROVIDED “AS IS”. McGRAW-HILL AND ITS LICENSORS MAKE NO GUARANTEES OR WARRANTIES AS TO THE ACCURACY, ADEQUACY OR COMPLETENESS OF OR RESULTS TO BE OBTAINED FROM USING THE WORK, INCLUDING ANY INFORMATION THAT CAN BE ACCESSED THROUGH THE WORK VIA HYPERLINK OR OTHERWISE, AND EXPRESSLY DISCLAIM ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. McGraw-Hill and its licensors do not warrant or guarantee that the functions contained in the work will meet your requirements or that its operation will be uninterrupted or error free. Neither McGraw-Hill nor its licensors shall be liable to you or anyone else for any inaccuracy, error or omission, regardless of cause, in the work or for any damages resulting therefrom. McGraw-Hill has no responsibility for the content of any information accessed through the work. Under no circumstances shall McGraw-Hill and/or its licensors be liable for any indirect, incidental, special, punitive, consequential or similar damages that result from the use of or inability to use the work, even if any of them has been advised of the possibility of such damages. This limitation of liability shall apply to any claim or cause whatsoever whether such claim or cause arises in contract, tort or otherwise. DOI: 10.1036/0071381244
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TABLE 3-1 Derivative Financial Instruments Traded on Organized Exchanges by Instrument and Location (Notational principal in billions of U.S. dollars) Amounts Outstanding
Instruments/Location
Turnover
1997 Dec.
1998 Dec.
1999 Sept.
1999 Dec.
1998 Year
1999 Year
1999 Q1
1999 Q2
1999 Q3
1999 Q4
7,752.7 7,489.2 51.9 211.5 3,233.9 3,082.6 48.5 102.9 2,550.3 2,496.2 1.1 53.1 1,928.9 1,876.1 0.1 52.8 39.6 34.4 2.3 2.9
8,061.2 7,702.2 38.1 321.0 3,536.8 3,365.3 38.9 134.7 2,914.1 2,788.4 0.3 127.5 1,581.2 1,523.9 0.1 57.2 29.0 26.7 0.8 1.5
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8,266.8 7,897.3 36.5 333.1 3,550.6 3,357.3 32.0 161.3 2,371.4 2,274.2 0.6 96.7 2,146.6 2,073.0 1.1 72.4 198.3 192.9 2.8 2.8
318,611.0 294,792.6 3.068.4 20,750.1 151,928.1 139,326.0 2,868.7 9.733.3 117,396.1 109,134.5 10.2 8,251.5 47,285.6 44,797.1 3.8 2,484.7 2,001.2 1,534.9 185.7 280.5
287,958.2 283,718.1 2.573.2 21,666.9 134,258.0 120,681.6 2,239.1 11,337.4 104,547.6 98,088.1 9.1 8,452.3 47,114.2 43,341.1 14.8 3,758.3 2,038.4 1,607.4 310.2 118.9
72,872.2 87,068.1 609.2 5,194.9 33,612.9 30,355.7 542.8 2,714.4 27,948.1 28,259.1 0.4 1,688.6 10,886.7 10,120.0 0.6 766.2 424.5 333.4 65.4 25.7
76,421.6 70,492.4 648.4 5,280.8 36,737.1 33,319.6 566.5 2,851.0 27,178.4 25,737.2 1.2 1,440.0 11,994.5 11,035.2 1.6 957.7 511.6 400.4 79.0 32.1
78,840.7 70,848.0 715.8 5,278.7 34,622.7 31,227.2 615.0 2,780.5 28,309.5 26,743.5 4.1 1,561.9 13,370.6 12,455.2 5.8 909.8 537.9 420.1 91.1 26.7
61,821.8 55,309.8 599.7 5,912.5 29,285.3 25,779.1 514.8 2,991.4 21,111.6 19,346.4 3.4 1,761.8 10,862.5 9,730.7 6.9 1,124.9 562.4 453.4 74.6 34.4
4,449.6 3,839.8 33.2 776.5 3,092.6 2,438.5 32.1 621.9 1,037.1 917.6 0.2 119.3 301.0 279.5 Ð 21.5 18.9 4.2 0.9 13.8
5,487.9 4,602.8 18.7 866.5 3,780.9 3,123.7 18.3 639.0 1,497.8 1,309.9 Ð 187.8 196.5 187.5 Ð 28.0 13.7 1.7 0.4 11.8
5,755.0 4,352.8 31.8 1,370.4 3,572.0 2,458.3 18.8 1,094.9 1,915.1 1,695.4 0.5 219.3 238.6 196.3 Ð 42.3 29.2 2.8 12.5 13.9
5,234.2 3,754.7 22.4 1,457.2 3,380.8 2,259.3 13.1 1,108.5 1,581.2 1,299.9 0.5 280.9 234.8 191.1 0.1 43.7 37.3 4.5 8.7 24.1
69,088.1 55,480.4 397.8 13,209.9 47,605.5 38,599.1 379.5 8,626.9 17,225.5 14,152.4 0.9 3,072.2 3,998.5 2,590.9 Ð 1,407.7 258.5 138.0 17.4 103.1
62,042.8 45,625.7 289.0 18,128.1 41,166.5 29,745.0 219.9 11,201.6 16,955.2 14,034.1 2.0 2,919.1 3,623.2 1,796.8 0.6 1,825.8 297.9 49.9 66.4 181.8
18,268.8 12,850.3 70.4 3,346.2 10,899.9 8,435.3 56.6 2,408.1 4,438.6 3,873.5 0.3 584.7 687.3 533.7 Ð 353.6 41.0 7.8 13.4 19.8
16,805.2 12,709.6 70.0 4,025.5 11,523.1 8,534.8 54.1 2,934.2 4,254.1 3,641.0 0.3 612.8 959.2 518.3 0.1 440.8 68.8 15.6 15.5 37.8
14,860.1 10,772.2 81.8 4,008.1 9,546.7 8,731.7 61.7 2,753.3 4,355.4 3,601.2 0.6 753.7 881.2 428.7 0.3 452.2 76.7 10.6 19.1 46.9
14,110.7 9,293.8 68.8 4,750.2 9,196.7 6,043.2 47.5 3,106.0 3,907.1 2,918.4 0.7 987.9 895.5 316.1 0.2 579.2 111.4 15.9 18.4 77.1
Futures All markets ................. Interest rate ............. Currency .................. Equity index ............. North America ............ Interest rate ............. Currency .................. Equity index ............. Europe ......................... Interest rate ............. Currency .................. Equity index ............. Asia and Paci®c ......... Interest rate ............. Currency .................. Equity index ............. Other Markets ............. Interest rate ............. Currency ................. Equity index ............. Options All markets ................. Intrerest rate ............ Currency ................. Equity index ............. North America ............ Interest rate ............. Currency .................. Equity index ............. Europe ....... ................. Interest rate ............. Currency .................. Equity index ............. Asia and Paci®c ......... Interest rate .............. Currency ................. Equity index ............. Other Markets ............. Interest rate ............. Currency .................. Equity index .............
(Source: Bank of International Settlements, Statistical Annex to the Quarterly Review on International Banking and Financial Market Developments, February 2000.)
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,&0 ( - ( > *
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DEFINITIONS futures contract # #
0
# # 0 3 )) futures price )& & expiration expiry date5 #
# J )& & ( cash settlement @&C C )& & ) 0 )& & ; ( & ) 0 (# #
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(
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0 & # #
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0 &
C )& &
( 0 0 # #
0 # 0
) C ( * &
0 ( ( # >
/ ,$ 6 !> >$, + $,' , *+ $>,+
111
TABLE 3-2 Derivative Financial Instruments Traded on Organized Exchanges by Instrument and Location (number of contracts in millions) Contracts Outstanding
Instruments/Location
1997 Dec.
1998 Dec.
1999 Sept.
Turnover 1999 Dec.
1998 Year
1999 Year
1999 Q1
1999 Q2
1999 Q3
1999 Q4
Futures All markets Interest rate ............ Currency ................ Equity index ........... North America ........... Interest rate ........... Currency ................ Equity index ............ Europe ..................... Interest rate ............. Currency ................. Equity index ........... Asia and Paci®c ........ Interest rate ............ Currency ................. Equity index ............ Other Markets ........... Interest rate ............ Currency ................. Equity index ............
23.4 19.4 2.0 2.0 5.2 4.3 0.4 0.5 6.9 5.0 1.4 0.5 3.6 2.8 Ð 0.8 7.8 7.3 0.3 0.2
20.7 17.3 0.8 2.6 5.5 4.6 0.3 0.5 6.2 4.7 0.4 1.1 3.1 2.2 Ð 0.9 6.0 5.7 0.1 0.2
22.3 18.2 0.6 3.5 5.7 4.7 0.4 0.5 6.1 4.3 0.1 1.7 4.0 3.0 Ð 1.0 6.5 6.1 0.1 0.3
21.3 17.5 0.7 3.1 5.4 4.5 0.3 0.6 6.5 3.6 0.2 1.6 3.3 2.5 Ð 0.7 7.1 6.8 0.1 0.2
992.5 760.0 54.5 178.0 357.7 287.9 27.0 42.8 423.1 345.1 8.9 68.2 128.4 76.7 0.1 49.6 85.3 49.4 18.8 17.4
914.7 672.7 37.1 204.9 319.9 248.6 23.9 47.5 417.9 322.9 1.8 93.4 115.8 65.9 0.3 49.5 61.1 35.2 11.4 14.5
231.6 168.4 8.7 54.5 83.9 66.8 8.0 11.1 106.6 78.6 0.4 27.5 28.6 16.1 Ð 12.5 12.5 6.9 2.3 3.4
237.8 178.4 9.5 49.9 85.9 68.0 6.3 11.8 105.9 84.8 0.4 21.0 30.9 17.5 Ð 13.3 15.2 8.3 2.8 4.0
238.6 178.0 10.2 50.5 80.7 61.9 6.3 12.5 111.1 88.3 0.2 22.5 30.3 18.2 0.1 12.0 16.8 9.5 3.5 3.5
206.6 147.9 8.8 49.9 69.5 52.0 5.3 12.2 94.3 71.4 0.5 22.4 28.0 14.1 0.1 11.7 16.8 10.3 2.9 3.8
Memorandum Items: Commodity Contracts U.S. markets ........... Other markets .........
6.1 2.7 3.4
6.3 2.8 3.5
7.1 3.3 3.8
6.5 2.9 3.6
306.9 153.4 153.4
327.5 165.6 162.0
82.0 40.2 41.8
81.5 41.7 39.8
86.8 44.9 41.9
77.2 38.7 38.6
All Markets ................ Interest rate ............ Currency ................. Equity index ............ North America .......... Interest rate ............ Currency ................. Equity index ............ Europe ........................ Interest rate ............ Currency ................. Equity index ............ Asia and Paci®c ........ Interest rate ............. Currency ................. Equity index ............ Other Markets ........... Interest rate ............ Currency ................. Equity index ............
17.4 6.0 2.4 9.0 7.8 3.4 0.4 3.9 5.6 2.0 0.1 3.5 1.0 0.5 Ð 0.5 3.0 0.1 1.9 1.1
17.4 6.9 0.9 9.8 8.6 4.5 0.2 3.8 6.0 2.1 Ð 3.9 0.8 0.2 Ð 0.6 2.1 Ð 0.7 1.4
27.4 6.7 0.7 20.1 8.8 3.7 0.2 4.8 15.8 2.7 Ð 13.1 1.1 0.2 Ð 0.9 1.8 0.1 0.5 1.3
27.1 5.6 0.5 21.0 7.5 3.2 0.1 4.2 16.3 2.1 Ð 14.1 1.0 0.2 Ð 0.8 2.2 0.1 0.3 1.8
336.8 129.7 12.1 195.0 172.3 86.1 5.4 80.7 102.8 37.4 0.4 65.0 44.8 4.5 Ð 40.1 17.1 1.7 6.3 9.2
447.3 118.0 6.8 322.5 142.9 72.2 2.8 67.9 186.8 41.7 0.1 144.9 91.9 3.0 0.1 88.8 26.7 1.0 3.8 20.9
102.2 31.5 1.6 69.1 39.3 21.1 0.8 17.4 37.7 9.3 Ð 28.4 20.0 0.9 Ð 19.0 5.2 0.2 0.8 4.3
110.8 32.5 1.6 76.8 38.3 20.9 0.7 16.6 43.1 10.5 Ð 32.7 22.6 0.9 Ð 21.7 6.8 0.3 0.8 5.6
111.4 28.2 1.9 81.3 34.4 16.4 0.8 17.2 48.1 10.9 Ð 37.2 22.9 0.7 Ð 22.2 6.0 0.2 1.1 4.7
122.9 25.7 1.7 95.5 31.0 13.8 0.5 18.7 57.7 11.1 Ð 48.8 28.5 0.5 Ð 25.9 7.7 0.3 1.1 6.3
Memorandum Items: Commodity Contracts U.S. markets ........... Other markets ......... Single Equity Contracts U.S. markets ........... Other markets .........
2.7 2.4 0.3 43.8 31.5 12.3
2.7 2.4 0.3 68.2 44.7 23.5
4.1 3.6 0.5 128.9 91.9 35.0
3.6 3.1 0.6 169.4 121.9 37.5
38.6 32.5 4.1 501.4 325.8 175.7
41.4 35.5 5.9 700.3 443.8 256.6
9.0 7.8 1.3 158.0 95.7 62.4
9.7 8.3 1.4 165.4 100.0 65.4
12.1 10.6 1.5 167.2 105.5 61.8
10.6 8.8 1.9 209.7 142.6 87.1
Options
(Source: Bank of International Settlements, Statistical Annex to the Quarterly Review on International Banking and Financial Market Developments, February 2000.)
/,?$A
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+
??' Volumes on Major Exchanges In millions of contracts traded
400 1998 1999 300
200
100
Eurex
CBOT
CBOE
CME
MATIF
LIFFE
0
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113
TABLE 3-3 FuturesÐAverage Month-End Open Interest, Number of Contracts Traded, and Number of Contracts Settled by Delivery or Cash Settlement by Major Groups, All Markets Combined, FY 1993±FY 1999 Fiscal Year
Total
Grain
Oilseed Products
Livestock Products
Average Month-End Open Interest (In Contracts) 1993 5,164,957 365,751 301,492 1994 6,508,063 422,468 323,368 1995 6,434,175 502,955 332,115 1996 6,671,956 594,283 383,027 1997 7,035,190 484,878 378,005 8,734,778 561,318 419,055 1998 1999 8,927,497 581,590 420,159
Other Agriculturals
Energy/ Wood Products
116,640 125,664 118,664 149,110 158,554 156,097 178,617
292,869 328,149 357,332 357,039 399,845 425,208 395,387
697,275 807,177 695,734 707,515 793,050 969,274 1,140,329
5,770,835 6,137,105 6,238,509 7,048,534 7,550,556 7,385,569 7,438,875
10,754,864 12,318,572 12,744,901 12,018,522 13,190,755 14,039,615 13,753,993
42,841,813 50,460,607 47,944,153 46,891,524 51,512,419 81,705,146 72,941,784
Number of Contracts Settled by Delivery/Cash Settlement 1993 2,082,970 48,573 179,284 11,695 1994 2,873,454 76,737 88,741 8,368 1995 2,995,958 70,548 158,003 12,900 1996 2,890,187 38,228 172,442 13,384 1997 3,559,079 36,589 148,703 29,883 1998 4,186,908 131,357 116,412 42,230 1999 3,631,918 120,775 106,364 44,129
56,840 44,373 60,593 39,406 38,015 31,828 32,282
62,744 78,108 75,209 87,777 119,505 129,586 131,905
Number of Contracts 1993 325,515,261 1994 411,056,929 1995 409,420,428 1996 394,182,422 1997 417,341,601 1998 500 ,676,345 1999 491,137,790
Traded 16,006,104 19,970,008 21,093,086 30,217,442 25,507,498 28,139,049 26,860,264
20,738,245 20,988,318 20,687,820 25,591,703 27,132,483 26,854,245 25,625,245
Metals
314,421 383,406 378,352 368,788 355,152 351,300 381,265
Financial Instruments
2,758,539 3,799,004 3,749,845 3,778,614 4,052,556 5,337 ,352 5,372,623
Currencies
317,970 338,829 299,178 335,580 413,150 515,176 477,527
15,197,631 185,397,113 28,808,456 18,231,411 252,579,136 30,371,774 17,393,317 259,024,379 24,293,461 16,938,969 234,261,790 21,213,938 17,093,481 250,143,412 25,210,997 17,044,818 319 ,916,853 27 ,590 ,350 17,294,322 303,684,764 23,558,563
184,621 189,502 157,323 132,507 129,977 163,804 128,557
1,035,375 1,809,418 1,939,908 1,903,974 2,385,886 2,705,700 2,230,017
503,838 578,209 521,473 502,451 670,721 865,921 837,687
*Revised since FY 1998 annual report. Note: The number of contracts settled by delivery or cash settlement indicates the number of contracts actually expiring as opposed to the positions traded and liquidated or rolled over before expiry. (Source: Commodity Futures Trading Commission, Annual Report 1999, www.cftc.org. Data for U.S. markets only.)
.
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TABLE 3-4 Point Value
Index
Exchangea
FTSE 100
LIFFE
DAX 30
Eurex
25
Quarterly
Nikkei 225
OSE
¥1,000
Quarterly
Nikkei 225
SIMEX
¥500
Quarterly
S&P 500
CME
$250
Quarterly
CAC 40
MATIF
a b c d e f g
£10
10
Cycleb Quarterly
Monthly
Expiry Third Friday Third Friday Second Friday Second Friday Third Friday Last trading day
Settlement Rule
Tickc
D+1
£0.5
D+1
0.5
D+3
¥10
D+2
¥5
D+2
$0:5
D+1
0.5
Special Quotation EDSP averagee Intraday auction Opening auction Equal to OSE's Opening auction Average
Margin Margin Requirementd Calculation £3,000
SPANf
8,500
Otherg
¥1,000,000
Other
¥562,500
SPAN
$23,438
SPAN
2,000
SPAN
LIFFE, London International Financial Futures Exchange; Eurex, European Exchange; OSE, Osaka Securities Exchange; Simex, Singapore International Monetary Exchange; MATIF, Marche aÁ Terme International de France. Quarterly: March, June, September, December. The tick value is the minimum variation in the quoted price of the future. Initial marginÐthat is, the minimum amount of money required on the account to authorize trading for one contract. EDSP, Exchange delivery settlement price. SPAN, Standard Portfolio Analysis of Risk, a margining system designed by the CME and very broadly used by clearing corporations worldwide. The Eurex runs its proprietary risk procedure, called ``Risk-Based Margining.'' Margin requirements are recomputed every day for several classes of assets, in a way similar to SPAN evaluations.
(Source: Exchanges respective Web sites, www.liffe.com, www.eurexchange.com, www.ose.or.jp, www.simex.com, www.cme.com, www.matif.fr, and Bloomberg.)
.
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TABLE 3-8 Index FTSE 100 DAX 30
Current Market Price
Point Value
Margin Requirement
Contract Nominal
£6,100
£10
£3,000
£60,000
7,500
25
8,500
187,500
Leverage Ratioa
20:1 22:1
Nikkei 225 (OSE)
¥20,000
¥1,000
¥1,000,000
¥20,000,000
20:1
Nikkei 225 (SIM)
¥20,000
¥500
¥562,500
¥10,000,000
18:1
$1,350
$250
$23,438
$337,500
14:1
6,000
10
2,000
60,000
30:1
S&P 500 CAC 40 a
Note that the leverage ratio depends on the current market price because margin requirements are usually constant through a long period of time.
132
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