I wrote a first draft of an article explaining what I believe to be an arbitrage situation with DMS.SELLING and mining difficulty futures on icbit.se (hence my previous questions about the cashflow of DMS.SELLING).
http://www.crypto-finance.com/difficulty_arbitrage.pdfI'm hoping that financially/mathematically skilled people can let me know about any mistakes. I hope you guys enjoy the read.
I didn't read the paper in detail, but I am curious why you chose DMS.SELLING instead of DMS.MINING (or TAT.VIRTURALMINE, or any other PMB for that matter). SELLING is effectively a short position and it seems to me that using MINING would result in a more straightforward analysis.
I guess the choice depends on which expected difficulty is higher. If the difficulty expected by the futures market were lower than the difficulty expected by DMS, you would sell the futures and buy MINING. In addition, since P = M + S, and S >> M, a change in the difficulty will have a more profound effect on the price of MINING.
I'm not sure if I understand your comment. But to be able to perform this hedge with DMS.MINING, I would have to be able to short it. I don't see how this hedge could work with a long position in DMS.MINING? DMS.MINING loses money if the difficulty goes up to the currently set level on icbit.se, hence I don't see any possible arbitrage scenario with DMS.MINING. But maybe I'm not seeing what you mean.
But you're correct (I think -- didn't do the math) that if the predicted difficulty were lower than the current DMS.MINING valuation, then I would buy DMS.MINING.