IMPACT OF VOLATILITY IN

CRUDE
Need of the study
Recent volatility

Effect on :arbitrage and basis

Objective
The sole objective to develop a relationship
amongst basis, arbitrage and volatility.
Hypothesis:
We assume that arbitrage, basis and volatility
are interrelated to each other
Contango = futures price > spot price.
Backwardation = futures price < spot price.
The level and the sign of basis (i.e.
backwardation or contango) is referred to as a
signal of the shortage or surplus of the physical
commodity in the market.
as the futures contract approaches its maturity
date, the basis gets smaller, since the costs of
storage are “no longer a factor” .
At the time of maturity, basis diminishes to
zero because spot and futures prices converge.
If these price relationships do not hold, there
are possible arbitrage opportunities in the
market.
Spot future parity
For spot and futures prices to be related, spot-
future parity should exist, which is the essence
of the law of one price in futures markets. Spot-
futures parity implies that stable arbitrage
opportunities based on the spot-futures
relationship are not possible.
an equality condition that should in theory
hold, or opportunities for arbitrage exist. Spot-
future parity is an appliance of the
law of one price.
We expect that the spot price of an asset
converges to that of the futures price as the
delivery date of the contract approaches ,
otherwise an arbitrage opportunity exists.
ARBITRAGE
Attempting to profit by exploiting price
differences of identical or similar financial
instruments on different markets or in different
forms. The ideal version is riskless arbitrage
 
Correlation between
A positive corelationship as high as 99%
Arbitrage strategy
The exact nature of this relationship will
depend :
on the nature of the commodity (i.e. storable
and non-storable)
its relative importance in the world economy
seasonal factors
market expectations
If the futures price stays above the spot price,
we can buy the asset now and short a futures
contract(i.e. agree to sell the asset later at
the future price). If the futures price stays
below the spot price, anyone who wants the
asset should go long on a futures contract and
accept delivery instead of paying the spot
price. This convergence means the spot price
may go up(down), the futures price may go
down (up), or both
Granger Causality Model
To test this Causality we will use the Granger
Causality Model to prove the direction of
influence. The Granger Causality test assumes
that the information relevant to the prediction
of the respective variables is contained solely
in the time series data of these variables.
Result:
Basis effects volatility

(whether positively/negatively)
.
Corelationship between basis and volatility.

A positive corelationshipas high as 99.68%

Conclusion
Basis volatility and arbitrage move in sync

The hypothesis holds true