One of the greatest rules of making money in the market is to buy low and sell high. No matter what one does, this rule underlies all investments made in any market, be it product or capital. From this rule stems one of the greatest modern means of making money: Arbitrage. The concept, as such, is quite a simple one: If the price of the same asset is different in two markets, there will be operators who will buy in the market where the asset sells cheap and sell in the market where it is costly. This activity termed as arbitrage, involves the simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices (Sharpe & Alexander 1990). So, you end up buying low and simultaneously selling high in a different market, thus, creating an opportunity to make money.
[...] IN SUCH A SCENARIO, IT BECOMES IMPERATIVE FOR AN INVESTOR TO SPOT SUCH OPPORTUNITIES AS SOON AS THEY ARISE. IN THIS REPORT, WE HAVE TRIED TO FIND OUT SOME SUCH OPPORTUNITIES OURSELVES AND SUGGESTED STRATEGIES TO TAKE THEIR ADVANTAGE IN A REAL MARKET SITUATION. WHILE SOME OF THESE ARE RECURRING OPPORTUNITIES IN THE MARKET, OTHERS ARE INSTANCES WHEN SUCH OPPORTUNITIES HAVE ARISEN AND PROVIDED A PROFITABLE OPPORTUNITY FOR THE INVESTORS. NIFTY SPOT NIFTY FUTURES THERE ARE VARIOUS WAYS TO ARBITRAGE BETWEEN THE SPOT AND THE INDEX FUTURES MARKET. [...]
[...] AS WE CAN SEE, THERE IS A CLEAR PREMIUM AVAILABLE IN THE ADS MARKET TO THE LATTER SCRIP. ARBITRAGE OPPORTUNITY IN CASE OF MERGER & ACQUISITIONS OFTEN, M&A TRANSACTIONS ARE SETTLED THROUGH SHARE SWAP AGREEMENTS. AT TIMES, PRICE ANOMALIES CAN OCCUR HERE WHICH COULD LEAD TO ANOMALIES IN PRICING LEADING TO ARBITRAGE OPPORTUNITIES. ONE RECENT EXAMPLE OF THIS IS FOUND IN THE ONGOING RIL TAKEOVER OF IPCL. THE SWAP RATIO DECIDED FOR IPCL SHARE HOLDERS IS 1 FOR I.E., FOR EVERY FIVE SHARES HELD BY THEM, THEY WOULD GET ONE RIL SHARE. [...]
[...] HE THEN SURRENDERS THE ETF UNITS TO THE ETF MANAGEMENT COMPANY IN EXCHANGE FOR THE INDEX BASKET AS FOLLOWS: NO. SECURITY NUMBER OF CURRENT VALUE SHARES MARKET PRICE TOTAL 630,767 WITH THE DISPOSAL OF THE BASKET OF SECURITIES AT PREVAILING MARKET PRICES, THE ARBITRAGE PROFITS IS, ASSUMING THE ABSENCE OF TRANSACTION COSTS, IS 20,767(630,767 610,000). LET'S TAKE THE CASE OF AN ETF BASED ON THE UNDERLYING INDEX:- AN ARBITRAGEUR CLOSELY MONITORS PRICE MOVEMENTS IN THE NSE 50 FUTURE AND NSE 50 ETF IN ORDER TO IDENTIFY POTENTIAL ARBITRAGE OPPORTUNITIES. [...]
[...] THE ARBITRAGE PROFITS COME IN AT THE EXPIRATION OF THE FUTURES CONTRACT WHEN THE POSITION IS UNWOUND BY BUYING BACK THE INDEX STOCKS. REVERSE CASH AND CARRY IS DONE WHEN THE FUTURES ARE UNDER PRICED, I.E. WHEN THE OBSERVED BASIS THOUGHT NEGATIVE, IS LESS THAN THE FAIR BASIS. OVERPRICED FUTURES ALSO RESULT IN ARBITRAGE. THIS IS CALLED CASH AND CARRY ARBITRAGE. IT INVOLVES BUYING THE UNDERLYING INDEX PORTFOLIO AND SELLING THE OVERPRICED FUTURES. AT MATURITY OF THE FUTURES CONTRACT, THE SPOT AND FUTURES PRICES CONVERGE. [...]
[...] THIS DIFFERENCE IN PRICE OF THE SAME STOCK BUT ON DIFFERENT EXCHANGES GIVES RISE TO AN ARBITRAGE OPPORTUNITY. FOR EG: SOURCE: WWW.MONEYCONTROL.COM IN THE ABOVE EXAMPLE ONE COULD EASILY EARN RISK LESS PROFIT BY BUYING THE STOCK ON THE EXCHANGE ON WHICH IT IS TRADING AT LOWER PRICE AND SELLING THE STOCK ON THE OTHER EXCHANGE ON WHICH THE STOCK IS TRADING AT A HIGHER PRICE. EG: BUYING MINDA IND. AT BSE WITH MARKET PRICE 130 AND SELLING IT ON NSE WITH MARKET PRICE 137 THEREBY MAKING A RISK LESS PROFIT OF SPOT FUTURES OPTIONS WHEN F&O SEGMENT COMMENCED IN THE COUNTRY, IT THREW OPEN A SEA OF OPPORTUNITIES FOR INVESTORS TO DESIGN TRADING STRATEGIES SUITABLE TO TAKE ADVANTAGE OF ARBITRAGE OPPORTUNITIES IN THIS SEGMENT. [...]
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