Metals Futures Market: Comparative Analysis of Investing and Arbitrage Strategies

Abstract

The article deals with applications of optimal portfolio theory and pair trading theory on the metals futures market. Advantages of futures market versus spot market include a relatively small initial price, low transaction costs, high volatility. The main aim of the research is to examine opportunities of both strategies for effective trading. The following financial instruments were chosen as the inputs of the models: futures on industrial metals (aluminum, copper, nickel, zinc, lead, tin), futures on precious metals (gold and silver). When constructing the optimal portfolio, it was decided to include Dow Jones Index futures and S&P Index futures among with metals. This is due to the fact that these instruments are extremely volatile and may play the role of hedge in the portfolio. To assess the performance of each strategy the drawdown indicator was used. The obtained results testify that both strategies can be applied on the real-life market. The final choice will depend on the investors risk acceptance level and the desired value of return.