Consider 3 futures contracts:

A BTC/ETH, settled in BTC 

B USD/ETH, settled in ETH

C USD/BTC, settled in BTC

As the markets aren't efficient, sometimes these contracts might move apart from each other.

To calculate the spread, I believe the formula would be

spread % = A / (B/C - 1) * 100%

If the spread is positive, and you want to earn the spread, which contracts should be long & short?

(I believe it should be long A, short B, long C)

  • $\begingroup$ Typically with this kind of arrangement, any potential arbitrage you see when you assume execution at mid prices vanishes when you consider bid/offers on the underlyings. What it tells you in reality is thst the mid prices are not the midpoint of the bid/offers. $\endgroup$ – will Sep 14 '19 at 9:00
  • $\begingroup$ I agree that you should work with $A_{BID},A_{ASK},B_{BID},B_{ASK},C_{BID},C_{ASK}$ rather than just three prices. Also this is called Triangular Arbitrage,not Delta Hedge. $\endgroup$ – Alex C Sep 14 '19 at 10:38

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